Table
of Contents
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,
2008
o
Transition
Report under Section 13 or 15(d) of the Exchange Act.
For the transition period from
to
0-23697
(Commission
file number)
NEW FRONTIER MEDIA, INC.
(Exact name of registrant as
specified in its charter)
Colorado
|
|
84-1084061
|
(State or other jurisdiction of
Incorporation or organization)
|
|
(I.R.S. Employer
Identification Number)
|
7007
Winchester Circle, Suite 200, Boulder, CO 80301
(Address of principal executive
offices)
(303)
444-0900
(Issuers telephone number,
including area code)
(Former name, former address
and former fiscal year, if changed since last report)
Indicate by checkmark whether the issuer (1) has 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
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated
filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
o
|
Accelerated filer
x
|
Non-accelerated filer
o
|
Smaller reporting
company
o
|
|
|
(Do not check if a smaller
reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As
of November 1, 2008, 22,649,077 shares of Common Stock, par value $.0001,
were outstanding.
Table
of Contents
Form 10-Q
NEW
FRONTIER MEDIA, INC.
FOR THE
FISCAL QUARTER ENDED SEPTEMBER 30, 2008
Table of Contents
2
Table
of Contents
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except par values)
|
|
(Unaudited)
|
|
|
|
|
|
September 30,
|
|
March 31,
|
|
|
|
2008
|
|
2008
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,544
|
|
$
|
18,325
|
|
Restricted cash
|
|
109
|
|
38
|
|
Marketable securities
|
|
1,474
|
|
930
|
|
Accounts receivable, net of allowance for
doubtful accounts of $257 and $169, at September 30, 2008 and
March 31, 2008, respectively
|
|
11,193
|
|
13,873
|
|
Deferred tax assets
|
|
601
|
|
620
|
|
Prepaid and other assets
|
|
1,384
|
|
1,899
|
|
|
|
|
|
|
|
Total current assets
|
|
28,305
|
|
35,685
|
|
|
|
|
|
|
|
Equipment and furniture, net
|
|
6,096
|
|
4,861
|
|
Prepaid distribution rights, net
|
|
11,101
|
|
10,381
|
|
Recoupable costs and producer advances, net
|
|
3,883
|
|
2,448
|
|
Film costs, net
|
|
7,383
|
|
7,626
|
|
Goodwill
|
|
18,608
|
|
18,608
|
|
Other identifiable intangible assets, net
|
|
2,983
|
|
3,033
|
|
Other assets
|
|
1,040
|
|
1,019
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
79,399
|
|
$
|
83,661
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,358
|
|
$
|
2,937
|
|
Dividend payable
|
|
|
|
2,982
|
|
Taxes payable
|
|
1,944
|
|
760
|
|
Producers payable
|
|
957
|
|
1,012
|
|
Deferred revenue
|
|
1,257
|
|
984
|
|
Accrued compensation
|
|
1,448
|
|
1,817
|
|
Deferred producer liabilities
|
|
2,009
|
|
2,862
|
|
Accrued and other liabilities
|
|
3,068
|
|
2,257
|
|
|
|
|
|
|
|
Total current liabilities
|
|
13,041
|
|
15,611
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
677
|
|
795
|
|
Taxes payable
|
|
216
|
|
216
|
|
Other long-term liabilities
|
|
771
|
|
1,002
|
|
|
|
|
|
|
|
Total liabilities
|
|
14,705
|
|
17,624
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock, $.10 par value, 4,999
shares authorized, no shares issued and outstanding
|
|
|
|
|
|
Common stock, $.0001 par value, 50,000
shares authorized, 22,649 and 23,775 shares issued and outstanding at
September 30, 2008 and March 31, 2008, respectively
|
|
2
|
|
2
|
|
Additional paid-in capital
|
|
58,088
|
|
61,854
|
|
Retained earnings
|
|
6,665
|
|
4,191
|
|
Accumulated other comprehensive loss
|
|
(61
|
)
|
(10
|
)
|
|
|
|
|
|
|
Total shareholders equity
|
|
64,694
|
|
66,037
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
79,399
|
|
$
|
83,661
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
3
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands, except per share amounts)
|
|
(Unaudited)
Quarter Ended
September 30,
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales
|
|
$
|
13,375
|
|
$
|
12,430
|
|
$
|
26,436
|
|
$
|
25,370
|
|
Cost of sales
|
|
4,429
|
|
3,459
|
|
8,358
|
|
7,256
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
8,946
|
|
8,971
|
|
18,078
|
|
18,114
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
2,133
|
|
1,640
|
|
4,558
|
|
3,708
|
|
General and administrative
|
|
4,602
|
|
3,989
|
|
9,323
|
|
8,652
|
|
Charge for asset dispositions and
impairments
|
|
65
|
|
90
|
|
65
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
6,800
|
|
5,719
|
|
13,946
|
|
12,723
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
2,146
|
|
3,252
|
|
4,132
|
|
5,391
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
68
|
|
215
|
|
146
|
|
469
|
|
Interest expense
|
|
(59
|
)
|
(53
|
)
|
(115
|
)
|
(96
|
)
|
Other income (loss), net
|
|
|
|
(13
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
9
|
|
149
|
|
31
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
2,155
|
|
3,401
|
|
4,163
|
|
5,776
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
(860
|
)
|
(1,256
|
)
|
(1,689
|
)
|
(2,134
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,295
|
|
$
|
2,145
|
|
$
|
2,474
|
|
$
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$
|
0.11
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$
|
0.11
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
|
|
$
|
0.13
|
|
$
|
|
|
$
|
0.25
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
4
Table of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
2,474
|
|
$
|
3,642
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
4,575
|
|
3,611
|
|
Tax benefit from option/warrant exercises
|
|
|
|
167
|
|
Share-based compensation
|
|
537
|
|
563
|
|
Deferred tax asset and liability, net
|
|
(99
|
)
|
(508
|
)
|
Charge for asset dispositions and
impairments
|
|
65
|
|
363
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
Accounts receivable
|
|
2,680
|
|
987
|
|
Accounts payable
|
|
(263
|
)
|
195
|
|
Prepaid distribution rights
|
|
(2,504
|
)
|
(2,388
|
)
|
Capitalized film costs
|
|
(1,167
|
)
|
(2,152
|
)
|
Deferred costs
|
|
|
|
(2,106
|
)
|
Deferred revenue
|
|
273
|
|
242
|
|
Producers payable
|
|
(55
|
)
|
(411
|
)
|
Taxes receivable and payable
|
|
1,184
|
|
275
|
|
Accrued compensation
|
|
(369
|
)
|
(1,547
|
)
|
Other assets and liabilities
|
|
(1,347
|
)
|
(45
|
)
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
5,984
|
|
888
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of investments available-for-sale
|
|
(1,730
|
)
|
(2,671
|
)
|
Redemption of investments
available-for-sale
|
|
1,184
|
|
7,532
|
|
Purchase of equipment and furniture
|
|
(2,222
|
)
|
(1,160
|
)
|
Purchase of intangible assets
|
|
(688
|
)
|
|
|
Payment of related party note arising from
business acquisition
|
|
(21
|
)
|
(555
|
)
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
(3,477
|
)
|
3,146
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from exercise of stock
options/warrants
|
|
|
|
512
|
|
Purchase of common stock
|
|
(4,303
|
)
|
(3,618
|
)
|
Payment of dividend
|
|
(2,982
|
)
|
(6,042
|
)
|
Excess tax benefit from option/warrant
exercise
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(7,285
|
)
|
(9,174
|
)
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(4,778
|
)
|
(5,140
|
)
|
Effect of exchange rate changes on cash and
cash equivalents
|
|
(3
|
)
|
|
|
Cash and cash equivalents, beginning of
period
|
|
18,325
|
|
17,345
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,544
|
|
$
|
12,205
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
5
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in
thousands)
|
|
(Unaudited)
Quarter Ended
September 30,
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income
|
|
$
|
1,295
|
|
$
|
2,145
|
|
$
|
2,474
|
|
$
|
3,642
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available-for-sale marketable securities, net of tax
|
|
(2
|
)
|
14
|
|
(2
|
)
|
14
|
|
Currency translation adjustment
|
|
(49
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
1,244
|
|
$
|
2,159
|
|
$
|
2,423
|
|
$
|
3,656
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
6
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS
EQUITY
(in
thousands)
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Common stock
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2
|
|
$
|
2
|
|
|
|
|
|
|
|
Balance at end of period
|
|
2
|
|
2
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
Balance at beginning of period
|
|
61,854
|
|
64,191
|
|
Exercise of stock options/warrants
|
|
|
|
512
|
|
Tax benefit for stock option/warrant
exercise
|
|
|
|
141
|
|
Purchase of common stock
|
|
(4,303
|
)
|
(3,618
|
)
|
Share-based compensation
|
|
537
|
|
563
|
|
|
|
|
|
|
|
Balance at end of period
|
|
58,088
|
|
61,789
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
Balance at beginning of period
|
|
4,191
|
|
7,536
|
|
Net income
|
|
2,474
|
|
3,642
|
|
Declared dividend
|
|
|
|
(6,042
|
)
|
|
|
|
|
|
|
Balance at end of period
|
|
6,665
|
|
5,136
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
Balance at beginning of period
|
|
(10
|
)
|
(30
|
)
|
Unrealized gain (loss) on
available-for-sale securities
|
|
(2
|
)
|
14
|
|
Unrealized loss on currency translation
adjustment
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
(61
|
)
|
(16
|
)
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
64,694
|
|
$
|
66,911
|
|
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
7
Table of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
New
Frontier Media, Inc. is a publicly traded holding company for its
operating subsidiaries which are reflected in the Transactional TV segment, the
Film Production segment and the Direct-to-Consumer segment.
Transactional TV Segment
The
Transactional TV segment is a leading provider of adult programming to multiple
system cable operators and direct broadcast satellite providers. The
Transactional TV segment is able to provide a variety of editing styles and
programming mixes to a broad range of adult consumers. Ten Sales, Inc.,
which is also reflected within the operating results of the Transactional TV
segment, was formed in April 2003 and is responsible for selling the
segments services.
Film Production Segment
The
Film Production segment derives its revenue from two principal businesses:
a) the production and distribution of original motion pictures known as erotic
thrillers, horror movies, and erotic, event styled content (collectively, owned
content) which is provided through the MRG Entertainment label and b) the
licensing of third party films in international and domestic markets where it
acts as a sales agent for the product (repped content) which is provided
through the Lightning Entertainment Group label. This segment also periodically
provides contract film production services to certain major Hollywood studios (producer-for-hire
arrangements).
Direct-to-Consumer Segment
The
Direct-to-Consumer segment aggregates and resells content through the internet.
Revenue in this segment is primarily generated through the acquisition of
monthly subscribers on adult-oriented consumer websites. The Direct-to-Consumer
segment also recently acquired intellectual property rights for a set-top box
that provides content to consumers through internet protocol television (IPTV)
technology. The Company is currently testing this business model concept.
Basis of Presentation
The
accompanying financial statements of New Frontier Media, Inc. and its
wholly owned subsidiaries (collectively hereinafter referred to as New
Frontier Media, the Company, we, and other similar pronouns) have been
prepared without audit pursuant to the rules and regulations of the United
States Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures made are adequate to make
the information not misleading. The Company believes these statements include
all adjustments, which are of a normal and recurring nature, considered
necessary for a fair presentation of New Frontier Medias financial position
and results of operations. The financial statements included herein should be
read in conjunction with the financial statements and notes thereto included in
New Frontier Medias latest annual report on Form 10-K filed with the SEC
on June 13, 2008.
The
results of operations for the three and six month periods ended September 30,
2008 are not necessarily indicative of the results to be expected for the full
year.
8
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Significant Accounting Policies
Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts
of New Frontier Media. All intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Estimates have been made by the Company in several areas, including, but
not limited to, estimated revenue for certain Transactional TV segment
pay-per-view and video-on-demand (VOD) services; the recognition and
measurement of deferred income tax assets and liabilities (including the
measurement of uncertain tax positions); the valuation of recoupable costs
including producer advances, direct costs and chargebacks; the achievement of
certain earn-out targets associated with the Companys acquisition of MRG
Entertainment, Inc., and its subsidiaries and a related company,
Lifestyles Entertainment, Inc. (collectively MRG) and the use of this
information to estimate earn-out expense; the forecast of anticipated revenue (ultimate
revenue), which is used to amortize film costs; the reporting of prepaid distribution
rights for the Transactional TV segment; the assessment of goodwill,
intangibles and other long-lived assets; and the valuation and recognition of
share-based compensation.
The
Company 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.
Reclassifications
The
Company has reclassified its prior year reporting to conform to the current
period presentation.
Fair Values of Financial Instruments
The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurement
, effective
April 1, 2008. There was no material impact on the Companys
condensed consolidated financial statements from the adoption of the SFAS No. 157.
SFAS No. 157 currently applies to all financial assets and liabilities and
for nonfinancial assets and liabilities recognized or disclosed at fair value
on a recurring basis. For all other nonfinancial assets and liabilities, SFAS No. 157
is effective for the first quarter of fiscal year 2010. In February 2008,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position
SFAS No. 157-2,
Effective Date of FASB
Statement No. 157
, which defers the application date of the
provisions of SFAS No. 157 for all nonfinancial assets and liabilities
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. Due to the deferral, the Company has
delayed the implementation of the provisions of SFAS No. 157 related to
the fair value of goodwill, intangible assets with indefinite lives and
nonfinancial long-lived assets. SFAS No. 157 requires a new disclosure
that establishes a framework for measuring fair value in accordance with
generally accepted accounting principles in the U.S. and the disclosure
requirement related to fair value measurements. SFAS No. 157 is intended
to enable the readers of financial statements to assess the inputs used to
develop those measurements by establishing a hierarchy for ranking the quality
and reliability of the information used to determine fair values. SFAS No. 157
requires that assets and liabilities carried at fair value be classified and
disclosed in one of the following categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
At
September 30, 2008, the Company had $1.5 million of available-for-sale financial
assets. The fair value for these assets was determined through a Level 1
category and was based on quoted market prices in
9
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of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
active
markets. The Company had no other financial assets and liabilities
carried at fair value at September 30, 2008.
Foreign Currency Translations
The
functional currency for all of the Companys U.S. based subsidiaries is the
U.S. dollar. The functional currency for the Companys foreign
subsidiaries is the local currency. Assets and liabilities denominated in
foreign currencies are translated using the exchange rates on the balance sheet
dates. Revenues and expenses are translated using the average exchange rates
prevailing during the periods presented. Any translation adjustments resulting
from this process are shown separately as a component of accumulated other
comprehensive income (loss) within shareholders equity in the condensed
consolidated balance sheets. Foreign currency transaction gains and losses are
reported in the operating expense section of the condensed consolidated
statements of income.
Recently Issued Accounting
Pronouncements
In
October 2008, the FASB issued Staff Position No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active
(FSP FAS 157-3). FSP FAS 157-3
clarified the application of FAS No. 157. FSP FAS 157-3 demonstrated
how the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been issued. The
implementation of this standard did not have an impact on the Companys results
of operations and financial position.
In
April 2008, the FASB issued Staff Position No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. The
intent of FSP FAS 142-3 is to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and
other applicable accounting literature. FSP FAS 142-3 is effective for fiscal
years beginning after December 15, 2008. The Company is currently
evaluating the potential impact of FSP FAS 142-3 on its results of operations
and financial position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
. SFAS No. 141(R) establishes
principles and requirements for how the acquirer in a business combination (a) recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; (b) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) applies to
business combinations for which the acquisition date is on or after December 15,
2008. The adoption of SFAS No. 141(R) will likely impact the Companys
results of operations and financial position to the extent that the Company
makes acquisitions subsequent to December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment to ARB No. 51
. SFAS No. 160
establishes accounting and reporting standards that require (a) the
ownership interest in subsidiaries held by parties other than the parent to be
clearly identified and presented in the Consolidated Balance Sheets within
equity, but separate from the parents equity; (b) the amount of
consolidated net income attributable to the parent and the noncontrolling
interest to be clearly identified and presented on the face of the Consolidated
Statement of Earnings; and (c) changes in a parents ownership interest
while the parent retains its controlling financial interest in its subsidiary
to be accounted for consistently. This statement is effective for fiscal years
beginning on or after December 15, 2008. The Company does not expect the
adoption of SFAS No. 160 will have a material impact on its results of
operations and financial position because the Company does not currently have
noncontrolling interests in any entity.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
. SFAS No. 159 permits companies to choose
to measure certain financial instruments and certain other items at fair value.
The standard requires that unrealized gains and losses on items for
10
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
which
the fair value option has been elected be reported in earnings. SFAS No. 159
was effective for the fiscal year beginning April 1, 2008 for the Company,
although earlier adoption was permitted. The adoption of SFAS No. 159 did
not have a material impact on the Companys results of operations and financial
position because the Company did not adopt the fair value option.
NOTE 2 INCOME PER SHARE
The
components of basic and diluted income per share are as follows (in thousands,
except per share amounts):
|
|
(Unaudited)
Quarter Ended
September 30,
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income
|
|
$
|
1,295
|
|
$
|
2,145
|
|
$
|
2,474
|
|
$
|
3,642
|
|
Average outstanding shares of common stock
|
|
23,202
|
|
24,120
|
|
23,445
|
|
24,232
|
|
Dilutive effect of warrants/stock options
|
|
14
|
|
105
|
|
29
|
|
192
|
|
Common stock and common stock equivalents
|
|
23,216
|
|
24,225
|
|
23,474
|
|
24,424
|
|
Basic income per share
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$
|
0.11
|
|
$
|
0.15
|
|
Diluted income per share
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$
|
0.11
|
|
$
|
0.15
|
|
Options
and warrants which were excluded from the calculation of diluted earnings per
share because the exercise price of the options and warrants was greater than
the average market price of the common shares were approximately 2.3 million
and 1.2 million for the quarters ended September 30, 2008 and 2007,
respectively, and 2.2 million and 0.6 million for the six month periods ended September 30,
2008 and 2007, respectively. Inclusion of these options and warrants
would be antidilutive.
NOTE 3 EMPLOYEE EQUITY INCENTIVE PLANS
The
Company adopted the New Frontier Media, Inc. 2007 Stock Incentive Plan
(the 2007 Plan) during fiscal year 2008. The 2007 Plan was approved by
the Companys shareholders and the purpose of the 2007 plan was to replace
prior plans with one incentive plan. No awards or grants are available to be
made under prior plans. Under the 2007 Plan, employees and directors of the
Company may be granted incentive stock options, restricted stock, bonus stock
and other awards, or any combination thereof. There were 1,250,000 shares of
the Companys common stock originally authorized for issuance under the 2007
Plan and the maximum number of shares of common stock that may be subject to
one or more awards granted to a participant during any calendar year is 350,000
shares. As of September 30, 2008, approximately 0.3 million awards
were available for issuance under the 2007 Plan.
Share-Based Compensation
In
accordance with the provisions of SFAS No. 123(R), the Company accounts
for employee and non-employee director stock options under the fair value
method which requires the use of an option pricing model for estimating fair
value. Accordingly, share-based compensation is measured at grant date based on
11
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NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
the
fair value of the award. The Company uses the straight-line attribution method
to recognize share-based compensation costs over the requisite service period
of the award.
Share-based
compensation is determined using the Black-Scholes option pricing model for
estimating the fair value of options granted under the Companys equity
incentive plan. The Company uses certain assumptions in order to calculate the
fair value of an option using the Black-Scholes option pricing model. The
volatility assumptions are derived using historical volatility data. The
expected term assumptions are stratified between officers and non-officers and
are determined using the estimated weighted average exercise behavior for these
two groups of employees. The dividend yield assumption is based dividends
declared by the Companys Board of Directors and estimates of dividends to be
declared in the future. The weighted average estimated fair values of stock
option grants and the weighted average assumptions that were used in
calculating such values for the quarters and six month periods ended September 30,
2008 and 2007 are presented below.
|
|
Quarter Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Weighted average estimated fair values per
award
|
|
(1)
|
|
$
|
2.02
|
|
$
|
2.33
|
|
$
|
2.02
|
|
Expected term (in years)
|
|
(1)
|
|
6
|
|
5
|
|
6
|
|
Risk free interest rate
|
|
(1)
|
|
4.1
|
%
|
2.7
|
%
|
4.1
|
%
|
Volatility
|
|
(1)
|
|
60
|
%
|
52
|
%
|
60
|
%
|
Dividend yield
|
|
(1)
|
|
7.6
|
%
|
-
|
%
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) No
options were granted during the quarter end September 30, 2008.
Share-based
compensation expense recognized in the condensed consolidated statements of
income during the quarters and six month periods ended September 30, 2008
and 2007 is based on awards ultimately expected to vest, which considers
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures were estimated
based on historical experience and are different for officers and non-officers.
The estimated forfeitures used for fiscal year 2009 were approximately 1% for
officers and 16% for non-officers. The estimated forfeitures used for
fiscal year 2008 were 0% for officers and approximately 16% for non-officers.
12
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The
following table summarizes the effects of share-based compensation resulting
from the application of SFAS No. 123(R) to options granted under the
Companys equity incentive plans. This expense is included in cost of sales and
selling, general and administrative expenses (in thousands, except per share
amounts):
|
|
Quarter Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Share-based compensation expense before
income taxes
|
|
$
|
280
|
|
$
|
288
|
|
$
|
537
|
|
$
|
563
|
|
Income tax benefit
|
|
(112
|
)
|
(107
|
)
|
(218
|
)
|
(208
|
)
|
Total share-based compensation expense
after income taxes
|
|
$
|
168
|
|
$
|
181
|
|
$
|
319
|
|
$
|
355
|
|
Share-based compensation effects on basic
earnings per common share
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Share-based compensation effects on diluted
earnings per common share
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Stock
option transactions during the six month period ended September 30, 2008
are summarized as follows:
|
|
Shares
|
|
Weighted
Avg.
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value(1)
(in
thousands)
|
|
Outstanding at March 31, 2008
|
|
1,727,802
|
|
$
|
6.39
|
|
|
|
|
|
Granted
|
|
623,500
|
|
$
|
4.76
|
|
|
|
|
|
Forfeited/Cancelled
|
|
(15,000
|
)
|
$
|
5.47
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
2,336,302
|
|
$
|
5.96
|
|
7.3
|
|
$
|
8
|
|
Options Exercisable at September 30,
2008
|
|
1,157,652
|
|
$
|
6.64
|
|
5.5
|
|
$
|
8
|
|
Options Vested and Expected to
VestNon-Officers
|
|
827,745
|
|
$
|
6.47
|
|
7.2
|
|
$
|
8
|
|
Options Vested and Expected to
VestOfficers
|
|
1,403,922
|
|
$
|
5.72
|
|
7.3
|
|
$
|
|
|
(1) The
aggregate intrinsic value represents the difference between the exercise price
and the value of New Frontier Media, Inc. stock at the time of exercise or
at the end of the period if unexercised.
13
Table of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Net
cash proceeds from the exercise of stock options were $0 and $0.3 million for
the quarters ended September 30, 2008 and 2007, respectively, and $0 and
$0.5 million for the six month periods ended September 30, 2008 and 2007,
respectively. The Company issues new shares of common stock upon the exercise
of stock options. As of September 30, 2008, there was $0.4 million and
$1.7 million of total unrecognized compensation costs for non-officers and
officers, respectively, related to stock options granted under the Companys
equity incentive plan. The unrecognized compensation cost for non-officers and
officers is expected to be recognized over a weighted average period of 3
years.
NOTE 4 SEGMENT INFORMATION
The
Company has adopted SFAS No. 131,
Disclosures
about Segments of an Enterprise and Related Information
, which
establishes reporting and disclosure standards for an enterprises operating
segments. Operating segments are defined as components of an enterprise for
which separate financial information is available and regularly reviewed by the
Companys chief operating decision maker.
The
Company has the following three reportable operating segments:
·
Transactional TVdistributes branded adult
entertainment programming networks and VOD content through electronic
distribution platforms including cable television and direct broadcast
satellite operators.
·
Film Productionproduces and distributes
mainstream films and erotic features and events. These titles are distributed
on U.S. and international premium channels, pay-per-view channels and VOD
systems across a range of cable and satellite distribution platforms. The Film
Production segment also distributes a full range of independently produced
motion pictures to markets around the world. Additionally, this segment
periodically provides producer-for-hire services to certain major Hollywood
studios.
·
Direct-to-Consumeraggregates and resells
adult content via the Internet. The Direct-to-Consumer segment sells content to
monthly subscribers primarily through its consumer websites. This segment also
includes the results of a set-top box IPTV business that began incurring costs
in the fourth quarter of fiscal year 2008 in connection with the testing of the
business model concept.
Expenses
reported as 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 Transactional TV, Film Production, or
Direct-to-Consumer segments. These costs include, but are not limited to, legal
and accounting expenses, insurance, registration and filing fees with NASDAQ,
executive employee costs, and the SEC, investor relations and printing costs
associated with the Companys public filings and shareholder communications.
14
Table
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NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The
accounting policies of the reportable segments are the same as those described
in the summary of accounting policies. Segment profit is based on income before
income taxes. The reportable segments are distinct business units, separately
managed with different distribution channels. The selected balance sheet
information and operating results of the Companys segments at the dates and
during the periods presented below were as follows (in thousands):
|
|
(Unaudited)
Quarter Ended
September 30,
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Transactional TV
|
|
$
|
10,773
|
|
$
|
9,995
|
|
$
|
21,329
|
|
$
|
20,362
|
|
Film Production
|
|
2,202
|
|
2,000
|
|
4,249
|
|
4,090
|
|
Direct-to-Consumer
|
|
400
|
|
435
|
|
858
|
|
918
|
|
Total
|
|
$
|
13,375
|
|
$
|
12,430
|
|
$
|
26,436
|
|
$
|
25,370
|
|
Segment profit (loss)
|
|
|
|
|
|
|
|
|
|
Transactional TV
|
|
$
|
5,453
|
|
$
|
5,129
|
|
$
|
10,955
|
|
$
|
10,243
|
|
Film Production
|
|
34
|
|
442
|
|
(34
|
)
|
305
|
|
Direct-to-Consumer
|
|
(654
|
)
|
97
|
|
(1,194
|
)
|
76
|
|
Corporate Aministration
|
|
(2,678
|
)
|
(2,267
|
)
|
(5,564
|
)
|
(4,848
|
)
|
Total
|
|
$
|
2,155
|
|
$
|
3,401
|
|
$
|
4,163
|
|
$
|
5,776
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Transactional TV
|
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
1
|
|
Film Production
|
|
1
|
|
1
|
|
3
|
|
1
|
|
Corporate Administration
|
|
67
|
|
213
|
|
143
|
|
467
|
|
Total
|
|
$
|
68
|
|
$
|
215
|
|
$
|
146
|
|
$
|
469
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer
|
|
$
|
3
|
|
$
|
|
|
$
|
7
|
|
$
|
|
|
Corporate Administration
|
|
56
|
|
53
|
|
108
|
|
96
|
|
Total
|
|
$
|
59
|
|
$
|
53
|
|
$
|
115
|
|
$
|
96
|
|
15
Table
of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
|
|
(Unaudited)
Quarter Ended
September 30,
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
Transactional TV
|
|
$
|
1,274
|
|
$
|
1,081
|
|
$
|
2,460
|
|
$
|
2,137
|
|
Film Production
|
|
971
|
|
577
|
|
1,825
|
|
1,363
|
|
Direct-to-Consumer
|
|
147
|
|
54
|
|
283
|
|
105
|
|
Corporate Administration
|
|
4
|
|
3
|
|
7
|
|
6
|
|
Total
|
|
$
|
2,396
|
|
$
|
1,715
|
|
$
|
4,575
|
|
$
|
3,611
|
|
|
|
(Unaudited)
September 30,
2008
|
|
March 31, 2008
|
|
Identifiable assets
|
|
|
|
|
|
Transactional
TV
|
|
$
|
138,228
|
|
$
|
125,500
|
|
Film
Production
|
|
34,416
|
|
34,269
|
|
Direct-to-Consumer
|
|
18,669
|
|
17,904
|
|
Corporate
Administration
|
|
46,890
|
|
47,838
|
|
Eliminations
|
|
(158,804
|
)
|
(141,850
|
)
|
Total
|
|
$
|
79,399
|
|
$
|
83,661
|
|
NOTE 5 MAJOR CUSTOMERS
The
Companys major customers (revenues in excess of 10% of total sales) are
Comcast Corporation (Comcast), DirecTV, Inc. (DirecTV), DISH Network
Corporation (DISH) and Time Warner, Inc. (Time Warner). These
customers are included in the Transactional TV and Film Production segments.
Revenue from these customers as a percentage of total revenue for each period
presented is as follows:
|
|
(Unaudited)
Quarter Ended
September 30,
|
|
(Unaudited)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Comcast
|
|
23
|
%
|
21
|
%
|
22
|
%
|
19
|
%
|
DirecTV
|
|
15
|
%
|
13
|
%
|
15
|
%
|
13
|
%
|
DISH
|
|
14
|
%
|
16
|
%
|
14
|
%
|
17
|
%
|
Time Warner
|
|
13
|
%
|
15
|
%
|
14
|
%
|
15
|
%
|
16
Table of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The Companys outstanding accounts receivable
balance due from its major customers as of September 30, 2008 and March 31,
2008 are as follows (in thousands):
|
|
(Unaudited)
September 30, 2008
|
|
March 31, 2008
|
|
Comcast
|
|
$
|
2,021
|
|
$
|
1,882
|
|
DirecTV
|
|
1,270
|
|
2,011
|
|
DISH
|
|
1,114
|
|
1,817
|
|
Time Warner
|
|
782
|
|
1,015
|
|
|
|
|
|
|
|
|
|
The loss of any of the Companys major customers
would have a material adverse effect on the Companys results of operations and
financial position.
NOTE 6 MARKETABLE SECURITIES
Marketable securities are required to be categorized
as trading, available-for-sale or held-to-maturity. As of September 30,
2008, the Company had no trading or held-to-maturity securities. The marketable
securities held by the Company at September 30, 2008 are categorized as
available-for-sale and are reported at fair value. Marketable securities held
by the Company at September 30, 2008 were as follows (in thousands):
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
898
|
|
$
|
|
|
$
|
|
|
$
|
898
|
|
Tax exempt municipal securities
|
|
574
|
|
2
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
1,472
|
|
$
|
2
|
|
$
|
|
|
$
|
1,474
|
|
The contractual maturities of these marketable
securities as of September 30, 2008, were as follows (in thousands):
|
|
Available-for-Sale
|
|
|
|
Securities
|
|
Year Ended
|
|
Gross
|
|
|
|
March 31,
|
|
Amortized Cost
|
|
Fair Value
|
|
2009
|
|
$
|
1,472
|
|
$
|
1,474
|
|
|
|
|
|
|
|
|
|
NOTE 7 ACQUISITION EARN-OUT
As part of the MRG acquisition, the Company entered
into an earn-out arrangement which provides for three additional earn-out
payments totaling $2.0 million payable to the selling shareholders of MRG over
a three year term if certain performance targets as defined by the purchase
agreement are achieved each year. The 2006 calendar year earn-out target was
exceeded and the amount due to the former principals of MRG of approximately
$0.7 million was paid in May 2007.
During the first nine months of calendar year 2007,
the Company estimated that the second annual earn-out target for the twelve
months ended December 31, 2007 would be met. However, actual results for
MRG were not sufficient to achieve the second annual performance target. As a
result, the previously accrued earn-out liability of approximately
$0.5 million was reversed. The second annual earn-out payment could still
be obtained by the selling shareholders of MRG if the performance results in
year three of the earn-out period exceed the related year three target by an
amount greater than the year two target shortfall. If actual performance or
estimates for the twelve month period ending December 31, 2008 indicate
that an overachievement equal to the shortfall in 2007 is likely to occur, the
Company may be required to record the earn-out expenses that were reversed in
subsequent future periods. The Company does not believe that the year three
earn-out or recoupment of the year two earn-out is probable based on current
estimates and
17
Table of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
historical performance data. As a result, the
Company has not accrued any earn-out amounts at September 30, 2008.
NOTE 8 LITIGATION
In the normal course of business, the Company is
subject to various lawsuits and claims. The Company believes that the final
outcome of these matters, either individually or in the aggregate, will not
have a material effect on its financial statements.
NOTE 9 CASH DIVIDENDS AND STOCK
REPURCHASE
In December 2005, the Companys Board of
Directors approved a 2.0 million share repurchase plan to be executed over
30 months, and the Company purchased approximately 0.9 million shares
through the original plan. In June 2008, the Companys Board of Directors
extended the plan through June 2010. During the six month period
ended September 30, 2008, the Company repurchased approximately
1.1 million shares for a total purchase price of approximately $4.3
million. The Company repurchased approximately $3.6 million of common stock
during the six month period ended September 30, 2007.
The Companys Board of Directors declared a cash
dividend of $0.125 per share of common stock during the fourth quarter of
fiscal year 2008, and the Company paid approximately $3.0 million for this cash
dividend in April 2008. The Board of Directors has not declared a
dividend during fiscal year 2009, and the payment of future dividends is at the
discretion of the Board of Directors.
NOTE 10 INCOME TAXES
Effective at the beginning of the first fiscal
quarter of 2008, the Company adopted the provisions of Financial Accounting
Standards Interpretation (FIN) No. 48,
Accounting
for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
.
FIN No. 48 contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes
. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon
effective settlement.
In accordance with the provisions of FIN No. 48,
the Company has total unrecognized tax benefits of approximately
$1.8 million of which approximately $0.2 million are not expected to
be settled within one year and have been classified as other long-term
liabilities at September 30, 2008. If the Company were to prevail or the
uncertainty were settled in favor of the Company on all uncertain tax
positions, the net effect is estimated to be a benefit to the Companys
effective tax rate of approximately $0.4 million. As of September 30,
2008, the Company had accrued approximately $0.5 million and $0 of
interest expense and penalties, respectively, of which approximately $46
thousand was recognized through interest expense during the quarter ended September 30,
2008. If the Company were to prevail or the uncertainty were settled in favor
of the Company on all uncertain tax positions, the reversal of this accrual
would result in a benefit to the Company. The Company estimates that it is
reasonably possible that the unrecognized tax benefits will be settled during
the fiscal year ended March 31, 2009 if one or more of the following
occur: a) the more-likely-than-not recognition threshold will be met
during the period, b) the tax is settled through negotiation or
litigation, or c) the statute of limitations for the relevant taxing authority
to examine and challenge the tax position will expire.
The Company files U.S. federal and state income
tax returns. The Company concluded an audit by the Internal Revenue Service (IRS)
for its fiscal year 2007 tax year, and the IRS proposed no changes to the
Companys fiscal year 2007 tax return in connection with the audit. With few
exceptions, the Company is no longer subject to examination of its federal and
state income tax returns for years prior to fiscal year 1999.
18
Table of Contents
NEW
FRONTIER MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 11 BORROWING ARRANGEMENTS
In July 2008, the Company obtained a $9.0
million line of credit from an outside financial institution. Amounts borrowed
under the line of credit can be used to support the Companys short-term
working capital needs. The line of credit is secured by the Companys trade
accounts receivable and will mature in July 2009. The interest rate
applied to borrowings under the line of credit is based on the greater of the
current prime rate less 0.13% or 5.75%. The terms of the line of credit include
certain defined negative and affirmative covenants customary for facilities of
this type, and the Company was in compliance with the covenants at September
30, 2008. The Company has made no borrowings under the line of credit.
NOTE 12 COMMITMENTS AND CONTINGENCIES
In August and September 2008, certain
executive officers and other key employees executed new or amended employment
contracts with the Company. The terms and conditions of the amended contracts
are materially equivalent to the original agreements. The impact of the new and
amended contracts on the Companys contractual future obligations is to
increase the amounts by $0.1 million, $0.5 million and $0.5 million in each of
the fiscal years ended March 31, 2009, 2010 and 2011, respectively.
NOTE 13 SUBSEQUENT EVENTS
In October 2008, certain executive officers and
other key employees executed new or amended employment contracts with the
Company. The terms and conditions of the amended contracts are materially
equivalent to the original agreements. The impact of the new and amended
contracts on the Companys contractual future obligations is to increase the
amounts by $0.1 million, $0.4 million and $0.4 million in each of the fiscal
years ended March 31, 2009, 2010 and 2011, respectively.
19
Table of Contents
ITEM 2.
MANAGEMENTS 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
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, could, 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 publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
Factors
that could cause actual results to differ materially from the forward-looking
statements include, but are not limited to, our ability to: 1) retain our
four major customers that accounted for approximately 65% of our total revenue
for the six month period ended September 30, 2008; 2) maintain the
license fee structures currently in place with our customers; 3) compete
effectively with our current competitors and potential future competitors that
distribute adult content to U.S. and international cable multiple system
operators (MSOs) and direct broadcast satellite (DBS) providers;
4) retain our key executives; 5) produce film content that is well
received by our Film Production segments customers; 6) 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; 7) effectively manage the test set-top box business model and attract
customers for the related product and 8) attract market support for our
stock. The foregoing list of factors is not exhaustive. For a more complete
list of factors that may cause results to differ materially from projections,
please refer to the Risk Factors section of our most recently filed Form 10-K
and Item 1A located in Part II herein, as updated by periodic and current
reports that we may file from time to time with the Securities and Exchange
Commission that amend or update such factors.
20
Table of Contents
Executive Summary
We are a leader in transactional television and the
international distribution of independent general motion picture entertainment.
Our key customers are large cable and satellite operators in the United States.
Our products are sold to these operators who then distribute them to retail
customers via pay-per-view and video-on-demand technology. We earn revenue
through contractual percentage splits of the retail price. Our three principal
businesses are reflected in the Transactional TV, Film Production and
Direct-to-Consumer operating segments.
Our most profitable business lines are the Transactional TV and Film Production
segments. Our Direct-to-Consumer segment is currently operating at a loss as a
result of costs we are incurring to develop an internet protocol television (IPTV)
test business model. Our Corporate Administration segment includes all costs
associated with the operation of the public holding company, New Frontier Media, Inc.,
including costs such as legal and accounting expenses, human resources and
training, insurance, registration and filing fees with NASDAQ, executive
employee costs and the SEC, investor relations, and printing costs associated
with our public filings and shareholder communications.
The business models of each of our
revenue-generating segments are summarized below.
Transactional TV
Segment
Our Transactional TV segment is focused on the
distribution of its pay-per-view and video-on-demand service to MSOs and DBS
providers in both domestic and international markets. We earn a percentage of
revenue, or split, from our content for each pay-per-view, subscription, or
video-on-demand transaction that is purchased on our customers platform.
Revenue growth occurs as we launch our services to new cable MSOs or DBS
providers, experience growth in the number of digital subscribers for systems
where our services are currently distributed, when we launch additional
services with existing cable and DBS providers, when our proportional buy rates
improve relative to our competitors, and when there is a general increase in
category buys on our customers platform. Revenue growth can also occur when
operators increase retail prices. Alternatively, our revenue could decline if
we experience lower buy rates, if the revenue splits we receive from our
customers decline, if our customers remove our channels or VOD content from
their platform, if our customers reduce the retail price of our content or if
additional competitive channels are added to our customers platforms.
Film Production
Segment
The Film Production segment has historically derived
the majority of its revenue from two principal businesses: (1) the
production and distribution of original motion pictures such as erotic
thrillers, horror movies, and erotic, event styled content (owned content);
and (2) the licensing of third party films in international and domestic
markets where we act as a sales agent for the product (repped content). This
segment also periodically provides contract film production services to certain
major Hollywood studios (producer-for-hire arrangements).
Direct-to-Consumer
Segment
Our Direct-to-Consumer segment generates revenue
primarily by selling monthly memberships to our consumer websites. During
fiscal year 2008, we focused our efforts on improving all aspects of our
internet product in terms of site design, navigation, features, content and
performance in an effort to increase traffic to the website and the conversion
of that traffic into paying members. We plan to launch a new version of our
primary consumer website during fiscal year 2009 that will provide potential
customers with new functionality and the opportunity to participate in a
virtual website community. This segment has also recently launched a test
initiative related to the development of a set-top box IPTV business model.
During January 2008, we acquired certain intellectual property rights to
an internet protocol set-top box. Through the set-top box, consumers can access
content through the internet and view the content on their television. The
service would be provided through a monthly subscription. We have been
incurring costs associated with this initiative which is currently being
tested.
21
Table of Contents
Critical Accounting Policies
The significant accounting policies set forth in
Note 1 to our audited consolidated financial statements included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2008, as
updated by Note 1 of the Notes to the Condensed Consolidated Financial
Statements included herein, and Managements Discussion and Analysis of
Financial Condition and Results of Operations, appropriately represent, in all
material respects, the current status of our critical accounting policies, and
are incorporated herein by reference.
Transactional TV Segment
The following table sets forth certain financial
information for the Transactional TV segment (amounts may not sum due to
rounding):
|
|
(In Millions)
Quarter Ended
September 30,
|
|
Quarterly
Percent
Change
|
|
(In Millions)
Year-to-Date
September 30,
|
|
Year-to-Date
Percent
Change
|
|
|
|
2008
|
|
2007(1)
|
|
08 vs07
|
|
2008
|
|
2007(1)
|
|
08 vs07
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VOD
|
|
$
|
5.6
|
|
$
|
4.7
|
|
19
|
%
|
$
|
10.8
|
|
$
|
9.3
|
|
16
|
%
|
PPV - Cable/DBS
|
|
5.0
|
|
4.9
|
|
2
|
%
|
10.0
|
|
10.2
|
|
(2
|
)%
|
C-Band and other
|
|
0.2
|
|
0.4
|
|
(50
|
)%
|
0.4
|
|
0.9
|
|
(56
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
10.8
|
|
10.0
|
|
8
|
%
|
21.3
|
|
20.4
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
2.9
|
|
2.7
|
|
7
|
%
|
5.5
|
|
5.5
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
7.9
|
|
7.3
|
|
8
|
%
|
15.8
|
|
14.8
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
73
|
%
|
73
|
%
|
|
|
74
|
%
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
2.4
|
|
2.1
|
|
14
|
%
|
4.8
|
|
4.6
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
5.5
|
|
$
|
5.1
|
|
8
|
%
|
$
|
11.0
|
|
$
|
10.2
|
|
8
|
%
|
(1) Net revenue from advertising has been
reclassified from PPV - Cable/DBS to C-Band and other revenue to conform with
the current period presentation. Additionally, the Company has
reclassified certain prepaid distribution rights amortization from the
Transactional TV segment to the Direct-to-Consumer segment to conform with the
current period presentation.
Net Revenue
VOD
The 19% and 16% increase in VOD revenue during the
current quarter and six month period ended September 30, 2008,
respectively, was primarily the result of an improvement in performance on
several of the top ten largest cable MSOs in the U.S. The improved performance
was primarily the result of the addition of new content packages and improved
menu positioning on the related platforms which resulted in overall category
growth as well as an increase in our category market share. The current quarter
results also included approximately $0.1 million of incremental international
VOD revenue.
PPV Cable/DBS
PPV Cable/DBS revenue increased during the current
quarter ended September 30, 2008 due primarily to the addition of a new
channel on the largest U.S. DBS platform during the third quarter of fiscal
year 2008. This increase was partially offset by a decline in revenue from the
second largest DBS provider in the U.S. from an increase in competition.
22
Table of Contents
PPV
Cable/DBS revenue declined during the six month period ended September 30,
2008 due to the above mentioned decline in revenue from the second largest DBS
provider in the U.S. Partially
offsetting this decline was an increase in revenue from the above mentioned new
channel on the largest DBS platform in the U.S.
C-Band
and Other Revenue
The
decline in C-Band and other revenue is from the C-Band services that we ceased
offering during the third quarter of fiscal year 2008.
Cost of Sales
Our
cost of sales consists of expenses associated with our digital broadcast
center, satellite uplinking, satellite transponder leases, programming
acquisitions, video-on-demand transport, and amortization of content
licenses. These costs also included in-house call center operations
related to the C-Band services that we ceased offering during the third quarter
of fiscal year 2008. The increase in cost of sales during the quarter
ended September 30, 2008 as compared to the same prior year quarter was
due to 1) an increase in transport costs to support the increase in U.S. VOD
distribution, 2) an increase in uplink costs to upgrade and improve the related
services and service capacity, and 3) an increase in transponder costs to
support an additional high definition offering.
These increases in costs were partially offset by a decline in costs
from the termination of the C-Band services.
Cost of sales during the six month period ended September 30, 2008
was flat because the increase in costs discussed above were fully offset by the
decline in costs from the termination of the C-Band services.
Operating Expenses and Operating
Income
The
increase in operating expenses during the quarter and six month period ended September 30,
2008 was due to an increase in advertising and promotion costs. Operating
income for the current quarter and six month period ended September 30,
2008 was $5.5 million and $11.0 million, respectively, and increased as
compared to $5.1 million and $10.2 million during the same respective periods
in the prior year.
Film Production Segment
The
following table sets forth certain financial information for the Film
Production segment (amounts may not sum due to rounding):
|
|
(In Millions)
Quarter Ended
September 30,
|
|
Quarterly
Percent
Change
|
|
(In Millions)
Year-to-Date
September 30,
|
|
Year-to-
Date
Percent
Change
|
|
|
|
2008
|
|
2007(1)
|
|
08 vs07
|
|
2008
|
|
2007(1)
|
|
08 vs07
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned content
|
|
$
|
1.7
|
|
$
|
1.4
|
|
21
|
%
|
$
|
3.4
|
|
$
|
2.8
|
|
21
|
%
|
Repped content
|
|
0.3
|
|
0.5
|
|
(40
|
)%
|
0.7
|
|
1.0
|
|
(30
|
)%
|
Other revenue
|
|
0.1
|
|
0.1
|
|
0
|
%
|
0.2
|
|
0.3
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2.2
|
|
2.0
|
|
10
|
%
|
4.2
|
|
4.1
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
1.0
|
|
0.5
|
|
#
|
|
1.9
|
|
1.3
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
1.2
|
|
1.5
|
|
(20
|
)%
|
2.4
|
|
2.8
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
55
|
%
|
75
|
%
|
|
|
57
|
%
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
1.1
|
|
1.0
|
|
10
|
%
|
2.4
|
|
2.5
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
0.0
|
|
$
|
0.4
|
|
#
|
|
$
|
0.0
|
|
$
|
0.3
|
|
#
|
|
23
Table of Contents
(1) Other
revenue was previously classified within owned content revenue and has been
reclassified to conform with the current period presentation.
#
Change is in excess of 100%.
Net Revenue
Owned
Content
Revenue
increased during the quarter and six month period ended September 30, 2008
primarily from the delivery of a thirteen episode series to a premium cable
channel customer. We delivered six titles during the first quarter of
fiscal year 2009 and seven titles during the current quarter. Revenue was also higher due to our delivery
of VOD content to the second largest DBS provider and other top ten cable MSOs
in the U.S. These increases in revenue were partially offset by 1) a
decline in revenue from a large pay-per-view aggregator, 2) a decline in horror
film revenue related to a home video and VOD arrangement with a mainstream
distributor, and 3) lower revenue from the largest DBS provider in the U.S. due
to a change in the location of our content within that providers electronic
programming guide.
Repped
Content
Repped
content revenue includes revenue from the licensing of film titles that we
represent (but do not own) under sales agency relationships with various
independent film producers. The decline in revenue is primarily related to the
impact of unfavorable economic conditions on the independent film market.
Other
Revenue
Other
revenue relates to amounts earned through producer-for-hire arrangements, music
royalty fees and the delivery of other miscellaneous film materials to
distributors. Other revenue during the quarter and six month period ended
September 30, 2008 continues to represent an immaterial amount of revenue.
Cost of sales
Our
cost of sales is comprised of the amortization of our owned content film costs
as well as delivery and distribution costs related to that content. These
expenses also include the costs we incur to provide producer-for-hire
services. There is no significant cost of sales related to the repped
content business.
The
increase in cost of sales during the quarter and six month period ended September 30,
2008 as compared to the same prior year periods is primarily due to higher film
cost amortization related to the delivery of titles from a thirteen episode
series. Additionally, the prior year results included a larger proportion
of revenue from older titles whose film costs had been fully amortized. This resulted in an unusually low film cost amortization
during the quarter and six month period ended September 30, 2007. Film cost amortization as a percentage of the
related owned content revenue during the quarter and six month period ended September 30,
2008 was 44% and 42%, respectively, as compared to 27% and 34% during the
quarter and six month period ended September 30, 2007, respectively.
Operating Expenses and Operating Income
Operating
expenses increased during the quarter ended September 30, 2008 as compared
to the same prior year quarter from our efforts to expand into DVD retail
markets with our repped content and from an impairment charge incurred for
unrecoupable costs. The increase in
costs was primarily offset by a reduction in the earn-out fee which the Company
is not accruing because it does not expect that the earn-out targets will be
achieved. The Film Productions
operating income was break-even during the quarter ended September 30,
2008 as compared to operating income of $0.4 million in the same prior year
quarter.
The
decrease in operating expenses during the six month period ended September 30,
2008 is primarily due to a decline in the previously mentioned earn-out
accrual. This decline was partially
offset by costs incurred for the repped content DVD efforts. The Film Production segments operating
income was break-even
24
Table of Contents
during
the six month period ended September 30, 2008 as compared to operating
income of $0.3 million during the same period in the prior year.
Direct-to-Consumer Segment
The
following table sets forth certain financial information for the
Direct-to-Consumer segment (amounts may not sum due to rounding):
|
|
(In Millions)
Quarter Ended
September 30,
|
|
Quarterly
Percent
Change
|
|
(In Millions)
Year-to-Date
September 30,
|
|
Year-to-
Date
Percent
Change
|
|
|
|
2008
|
|
2007(1)
|
|
08 vs07
|
|
2008
|
|
2007(1)
|
|
08 vs07
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net membership
|
|
$
|
0.3
|
|
$
|
0.3
|
|
0
|
%
|
$
|
0.7
|
|
$
|
0.7
|
|
0
|
%
|
Other
|
|
0.1
|
|
0.1
|
|
0
|
%
|
0.1
|
|
0.2
|
|
(50
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
0.4
|
|
0.4
|
|
0
|
%
|
0.9
|
|
0.9
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
0.5
|
|
0.2
|
|
#
|
|
0.9
|
|
0.4
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
(0.1
|
)
|
0.2
|
|
#
|
|
(0.1
|
)
|
0.5
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
^
|
|
50
|
%
|
|
|
^
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
0.5
|
|
0.2
|
|
#
|
|
1.1
|
|
0.4
|
|
#
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(0.7
|
)
|
$
|
0.1
|
|
#
|
|
$
|
(1.2
|
)
|
$
|
0.1
|
|
#
|
|
(1) We
have reclassified certain prepaid distribution rights amortization from the
Transactional TV segment to the Direct-to-Consumer segment to conform with the
current period presentation.
#
Change is in excess of 100%.
^
Information is not meaningful.
Net Revenue
Revenue
from our Direct-to-Consumer segment primarily consists of amounts earned
through the provision of internet subscriptions to customers. Net
membership revenue during the quarter and six month period ended September 30,
2008 was consistent with the same prior year periods.
Other
revenue has been consistent and comparable with prior periods. This
revenue primarily relates to the sale of content to other webmasters, the
distribution of our website to the LodgeNet Entertainment Corporation customer
base, and revenue from the distribution of our content through wireless
platforms.
Cost of Sales
Cost
of sales consists of expenses associated with credit card processing,
bandwidth, traffic acquisition, content and depreciation of assets. These
costs also include expenses incurred in connection with our efforts to launch a
test IPTV business model and primarily include the initial employee, depreciation,
amortization and travel costs incurred for the future distribution of content
through that product line.
The
Direct-to-Consumer segments cost of sales increased during the quarter and six
month period ended September 30, 2008 as a result of additional costs
incurred for the test IPTV business model.
25
Table of Contents
Operating Expenses and Operating
Income (Loss)
Operating
expenses increased during the quarter and six month period ended September 30,
2008 as compared to the same prior year periods due to additional costs
incurred in connection with the test IPTV business model. We incurred an
operating loss of $0.7 million and $1.2 million for the quarter and six month
period ended September 30, 2008 as compared to an operating income of $0.1
million in each of the quarter and six month period ended September 30,
2007.
Corporate Administration Segment
The
following table sets forth certain financial information for the Corporate
Administration segment:
|
|
(In Millions)
Quarter Ended
September 30,
|
|
Quarterly
Percent
Change
|
|
(In Millions)
Year-to-Date
September 30,
|
|
Year-to-Date
Percent
Change
|
|
|
|
2008
|
|
2007
|
|
08 vs07
|
|
2008
|
|
2007
|
|
08 vs07
|
|
Operating expenses
|
|
$
|
2.7
|
|
$
|
2.4
|
|
13
|
%
|
$
|
5.6
|
|
$
|
5.2
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
related to the Corporate Administration segment include all costs associated
with the operation of the public holding company, New Frontier Media, Inc.,
which are not directly allocable to the Transactional TV, Film Production, and
Direct-to-Consumer segments. These costs include, but are not limited to, legal
and accounting expenses, human resources and training, insurance, registration
and filing fees with NASDAQ, executive employee costs and the SEC, investor
relations, and printing costs associated with our public filings and
shareholder communications.
Corporate
administration expenses incurred during the quarter and six month period ended September 30,
2008 increased as compared to the same prior year periods from 1) an increase
in travel and administrative costs in connection with our international
expansion efforts, and 2) an increase in third party advisor fees.
Liquidity and Capital Resources
Our
current priorities for the use of our cash are:
·
investments in processes intended to improve
the quality and marketability of our products;
·
funding the operations of the set-top box
IPTV business within our Direct-to-Consumer segment; and
·
funding our operating and capital
requirements.
We
believe that existing cash and anticipated cash generated from operations will
be sufficient to satisfy our operating requirements for the foreseeable future,
and we believe that any foreseeable capital expenditures, content licensing,
film production costs and set-top box purchases that may be incurred can be
financed through our current existing cash and investments, our expected cash
flows from operations and available borrowing facilities.
Sources and Uses of Cash
Cash
Flows from Operating and Investing Activities
Our
cash flows from operating and investing activities are summarized as follows
(amounts in table may not sum due to rounding):
|
|
(In Millions)
Six Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Net cash provided by operating activities
|
|
$
|
6.0
|
|
$
|
0.9
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of investments available-for-sale
|
|
(1.7
|
)
|
(2.7
|
)
|
Redemption of investments
available-for-sale
|
|
1.2
|
|
7.5
|
|
Purchases of equipment and furniture
|
|
(2.2
|
)
|
(1.2
|
)
|
Purchases of intangible assets
|
|
(0.7
|
)
|
|
|
Payment of related party note arising from
business acquisition
|
|
(0.0
|
)
|
(0.6
|
)
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
$
|
(3.5
|
)
|
$
|
3.1
|
|
26
Table of Contents
The
increase in cash provided by operating activities during the six month period
ended September 30, 2008 as compared to the same prior year period is
primarily from the following:
·
an increase in cash flows
from improved efficiencies related to the collection of accounts receivable in
our Transactional TV and Film Production segments;
·
an increase in cash flows
arising from lower fiscal year 2008 bonus amounts that were paid during the
first quarter of fiscal 2009; and
·
an increase in cash flows
from the decline in owned and producer-for-hire content creation within the
Film Production segment.
Cash
used in investing activities was $3.5 million during the six month period ended
September 30, 2008 as compared to cash provided by investing activities of
$3.1 million in the same prior year period.
We used approximately $0.5 million of cash for net purchases of investments.
Approximately $2.2 million of cash was used for capital expenditures to acquire
additional electronic storage equipment for our Transactional TV segment and to
upgrade certain administrative hardware and software. We also used approximately $0.7 million to
purchase intangible assets within our Direct-to-Consumer segment. We made
no material related party payments during the first half of fiscal year 2009.
Cash
Flows from Financing Activities
Our
cash flows from financing activities are as follows (amounts in table may not
sum due to rounding):
|
|
(In Millions)
Quarter Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from exercise of stock
options/warrants
|
|
$
|
|
|
$
|
0.5
|
|
Purchase of common stock
|
|
(4.3
|
)
|
(3.6
|
)
|
Payment of dividends
|
|
(3.0
|
)
|
(6.0
|
)
|
Excess tax benefit from option/warrant
exercise
|
|
|
|
0.0
|
|
Net cash used in financing activities
|
|
$
|
(7.3
|
)
|
$
|
(9.2
|
)
|
Net
cash used in financing activities during the current quarter includes $3.0
million in payments for cash dividends and $4.3 million for the purchase of
approximately 1.1 million shares of our common stock through our stock
repurchase program.
Stock Repurchase Plan and Dividends
In
December 2005, our Board of Directors approved a 2.0 million share
repurchase plan to be executed over 30 months, and we purchased
approximately 0.9 million shares through the original plan. In June 2008,
our Board of Directors extended the plan through June 2010. During
the six month period ended September 30, 2008, we repurchased
approximately 1.1 million shares for a total purchase price of
approximately $4.3 million. We repurchased approximately $3.6 million of common
stock during the six month period ended September 30, 2007.
Our
Board of Directors declared a cash dividend of $0.125 per share of common stock
during the fourth quarter of fiscal year 2008, and we paid approximately $3.0
million for this cash dividend in April 2008. The Board of Directors
has not declared a dividend during fiscal year 2009, and the payment of future
dividends is at the discretion of the Board of Directors.
27
Table of Contents
Borrowing Arrangements
In
July 2008, we obtained a $9.0 million line of credit from an outside
financial institution. Amounts borrowed under the line of credit can be used to
support our short-term working capital needs. The line of credit is secured by
our trade accounts receivable and will mature in July 2009. The interest
rate applied to borrowings under the line of credit is based on the greater of
the current prime rate less 0.13% or 5.75%. The terms of the line of credit
include certain defined negative and affirmative covenants customary for
facilities of this type, and we were in compliance with the covenants at
September 30, 2008. We have made no borrowings under the line of credit.
Commitments and Contingencies
As
part of the MRG Entertainment, Inc. (MRG) acquisition that occurred in
fiscal year 2006, we entered into an earn-out arrangement which provides for
three additional earn-out payments totaling $2.0 million payable to the selling
shareholders of MRG over a three year term if certain performance targets as
defined by the purchase agreement are achieved each year. The 2006 calendar
year earn-out target was exceeded and the amount due to the former principals
of MRG of approximately $0.7 million was paid in May 2007.
During
the first nine months of calendar year 2007, we estimated that the second
annual earn-out target for the twelve months ended December 31, 2007 would
be met. However, actual results for MRG were not sufficient to achieve the
second annual performance target. As a result, the previously accrued earn-out
liability of approximately $0.5 million was reversed. The second annual
earn-out payment could still be obtained by the selling shareholders of MRG if
the performance results in year three of the earn-out period exceed the related
year three target by an amount greater than the year two target shortfall. If
actual performance or estimates for the twelve month period ending December 31,
2008 indicate that an overachievement equal to the shortfall in 2007 is likely
to occur, we may be required to record the earn-out expenses that were reversed
in subsequent future periods. We do not believe that the year three earn-out or
recoupment of the year two earn-out is probable based on current estimates and
historical performance data. As a result, we have not accrued any earn-out
amounts at September 30, 2008.
In
connection with our adoption of FIN 48,
Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
,
we have a $1.8 million liability recorded for unrecognized tax benefits at September 30,
2008. Approximately $1.6 million of the liability is expected to be settled
within one year and has been classified as a current liability within taxes
payable. Please refer to Note 10 Income Taxes within the Condensed
Consolidated Financial Statements for additional detail on the $1.8 million
liability.
In August, September and October of 2008, certain
executive officers and other key employees executed new or amended employment
contracts with the Company. The terms and conditions of the amended contracts
are materially equivalent to the original agreements. The impact of the new and
amended contracts on the Companys contractual future obligations is to
increase the amounts by $0.2 million, $0.9 million and $0.9 million in
each of the fiscal years ended March 31, 2009, 2010 and 2011,
respectively.
Recent Accounting Pronouncements
For
a discussion of the recent accounting pronouncements related to our operations,
please refer to the related information provided under Note 1 Business and
Summary of Significant Accounting Policies to the accompanying Condensed
Consolidated Financial Statements, which information is incorporated herein by
reference.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk.
The Companys exposure to market risk is principally confined to cash
in the bank, money market accounts and certificates of deposit, which have
short maturities and, therefore, minimal and immaterial market risk.
Interest Rate Sensitivity.
As of November 1, 2008, the Company had
cash in checking and money market accounts, certificates of deposits, and fixed
income debt securities. 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.
As
of November 1, 2008, the Company had no borrowings under its line of
credit and so a sudden change in the prime rate would not have a material
impact on the Companys results of operations.
Foreign Currency Exchange Risk.
The Company does not have any material
foreign currency transactions.
28
Table of Contents
ITEM 4. CONTROLS AND PROCEDURES.
(a)
Disclosure Controls and Procedures.
Our
Companys management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and
operation of our Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer
and the Chief Financial Officer concluded that, as of September 30, 2008,
the Companys disclosure controls and procedures were effective.
(b)
Internal Controls.
There were no changes
in our internal control over financial reporting that occurred during our
second fiscal quarter of 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1A. RISK FACTORS.
In
addition to the other information set forth below and elsewhere in this report,
you should carefully consider the factors discussed in Part I, Item 1A
Risk Factors in our Annual Report on Form 10-K for the year ended March 31,
2008, as such risk factors have been updated by the filing with the SEC of
subsequent periodic and current reports from time to time, which factors could
materially affect our business, financial condition, or future results. The
risks described in our Annual Report on Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition, and/or reporting results.
Current market volatility and difficult conditions
in the financial services markets may materially and adversely impact our
business and results of operations.
The
global capital and credit markets have deteriorated significantly in recent
months, resulting in the failure of major financial institutions, the
reluctance of other major financial institutions to lend money, an increase in
commercial and consumer delinquencies, a lack of consumer confidence, and a
widespread reduction generally of business activity. If these conditions
continue, which may be likely for the foreseeable future, or worsen, our
ability to borrow funds or obtain other financing on terms acceptable to us
could be materially adversely affected.
These conditions could also, among other things, negatively impact our
customers ability to pay us, the number of subscribers and purchasers of our
products and services, and require us to increase our reserves for bad debt,
the occurrence of any or all of which could materially and negatively impact
our business, our financial condition and our results of operations.
The loss of any of our current major customers, or
our inability to maintain favorable terms with these customers, could have a
material adverse affect on our financial position and results of operations.
We
currently have agreements with nine of the ten largest U.S. cable MSOs, DISH
Network, and DirecTV. Our agreements with these operators may be terminated on
relatively short notice without penalty. If one or more of these cable MSO or
DBS operators terminates or does not renew our agreements, or does not renew
the agreements on terms as favorable as those of our current agreements, our
financial position and results of operations could be materially adversely
affected. For our fiscal year ended March 31, 2008, the aggregate revenue we
received from our major customers (customers that account for 10% or more of
our consolidated revenue including Comcast, DISH, DirecTV and Time Warner) was
approximately 59% of our total company-wide revenue. For the six month period
ended September 30, 2008, the aggregrate revenue we received from our
major customers was approximately 65% of total company-wide revenue.
Our failure to meet our performance targets with
DirecTV could adversely affect our financial position and results of
operations.
Our
agreement with DirecTV provided for an automatic one year carriage extension to
mid-October 2009 on existing terms for each of our three DirecTV channels
that achieved predetermined revenue targets by October 2008. The revenue
targets for each channel were not met, however, and DirecTV may therefore seek
to negotiate a new agreement with us or it may seek to remove one or more of
our channels from its services. If any
such negotiations result in DirecTV removing one or more of our channels from
its
29
Table of Contents
services,
or if it is successful in negotiating terms more favorable to it than under the
current agreement, or if it replaced any of our channels with channels of our
competitors, our financial position and results of operations could be
materially adversely affected.
ITEM 2. UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS.
On
December 13, 2005, the Board of Directors of the Company approved the
repurchase of 2.0 million shares of common stock to be implemented over 30
months. The Company purchased approximately 0.9 million shares of common stock
through this initial plan. In June 2008, the Board of Directors of the
Company extended the duration of the plan through June 2010. During
the quarter ended September 30, 2008, the Company purchased shares in
connection with the extended program (in thousands, except per share amounts):
Period
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid Per Share
|
|
Total Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or Programs
|
|
Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Plans or
Programs
|
|
July 1-31, 2008
|
|
|
|
$
|
|
|
|
|
746
|
|
August 1-31, 2008
|
|
249
|
|
3.98
|
|
249
|
|
497
|
|
September 1-30, 2008
|
|
494
|
|
3.67
|
|
494
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
743
|
|
$
|
3.77
|
|
743
|
|
|
|
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The
Companys annual meeting of its shareholders was held on August 25, 2008
in Santa Monica, California. The matters submitted for a vote at the meeting
and the related election results were as follows:
1.
Election of six directors to the Board of Directors to serve for the following
year and until their successor is elected:
|
|
For
|
|
Withheld
|
|
Broker
Non-Vote
|
|
Michael Weiner
|
|
18,586,246
|
|
3,214,545
|
|
0
|
|
Alan L. Isaacman
|
|
14,586,756
|
|
7,214,035
|
|
0
|
|
Hiram J. Woo
|
|
18,586,455
|
|
3,214,336
|
|
0
|
|
David Nicholas
|
|
18,594,697
|
|
3,206,094
|
|
0
|
|
Melissa Hubbard
|
|
18,592,847
|
|
3,207,944
|
|
0
|
|
Walter Timoshenko
|
|
18,594,679
|
|
3,206,112
|
|
0
|
|
2.
Ratification of the appointment of Grant Thornton LLP as the Companys
independent auditors for the fiscal year ending March 31, 2009:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Vote
|
|
18,667,717
|
|
421,243
|
|
2,711,831
|
|
0
|
|
As
a result, all of the matters submitted for a vote at the meeting were approved
by the shareholders.
30
Table of Contents
ITEM 6. EXHIBITS
Exhibit No.
|
|
Exhibit Description
|
3.01
|
|
|
Amended
and Restated Bylaws of New Frontier Media, Inc.
|
4.01
|
|
|
Rights
Agreement, which includes as Appendix A the form of Certificate of
Designation, Preferences and Rights of Series A Preferred Stock, as
Appendix B the related form of Rights Certificate, and as Appendix C the
related Summary of Rights to Purchase Series A Preferred Stock
(incorporated by reference to Exhibit 4.01 to Registrants Form 8-K
(File No. 000-23697) filed August 1, 2008)
|
10.01
|
|
|
New
Frontier Media, Inc. Summary of Director Compensation Arrangements
|
10.02
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Michael Weiner
|
10.03
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Grant Williams
|
10.04
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Ira Bahr
|
10.05
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Ken Boenish
|
10.06
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Marc Callipari
|
10.07
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Scott Piper
|
31.01
|
|
|
Certification
by CEO Michael Weiner pursuant to Rule 13a-14(a)/15d-14(d)
|
31.02
|
|
|
Certification
by CFO Grant Williams pursuant to Rule 13a-14(a)/15d-14(d)
|
32.01
|
|
|
Certification
by CEO Michael Weiner pursuant to U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.02
|
|
|
Certification
by CFO Grant Williams pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
31
Table
of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed in its behalf
by the undersigned thereunto duly authorized.
|
NEW FRONTIER MEDIA, INC.
|
Dated: November 7, 2008
|
By:
|
/s/ Michael Weiner
|
|
Name: Michael Weiner
|
|
Title: Chief Executive Officer
|
32
Table
of Contents
EXHIBIT
INDEX
Exhibit No.
|
|
Exhibit Description
|
3.01
|
|
|
Amended
and Restated Bylaws of New Frontier Media, Inc.
|
4.01
|
|
|
Rights
Agreement, which includes as Appendix A the form of Certificate of
Designation, Preferences and Rights of Series A Preferred Stock, as
Appendix B the related form of Rights Certificate, and as Appendix C the
related Summary of Rights to Purchase Series A Preferred Stock
(incorporated by reference to Exhibit 4.01 to Registrants Form 8-K
(File No. 000-23697) filed August 1, 2008)
|
10.01
|
|
|
New
Frontier Media, Inc. Summary of Director Compensation Arrangements
|
10.02
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Michael Weiner
|
10.03
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Grant Williams
|
10.04
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Ira Bahr
|
10.05
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Ken Boenish
|
10.06
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Marc Callipari
|
10.07
|
|
|
Amended
and Restated Employment Agreement between New Frontier Media, Inc. and
Scott Piper
|
31.01
|
|
|
Certification
by CEO Michael Weiner pursuant to Rule 13a-14(a)/15d-14(d)
|
31.02
|
|
|
Certification
by CFO Grant Williams pursuant to Rule 13a-14(a)/15d-14(d)
|
32.01
|
|
|
Certification
by CEO Michael Weiner pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.02
|
|
|
Certification
by CFO Grant Williams pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
33
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