New Frontier Dips After Ruling

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New Frontier Media Inc. last week said it would continue with its adult pay-per-view network business despite losing a multimillion-dollar lawsuit over a letter of intent with an outside investor.

But the company's statements did little to reassure Wall Street, as the company's stock price plummeted on news of the unfavorable ruling.

A six-person Boulder County, Colo., district-court jury found the adult-PPV company liable for claims stemming from a 1998 "letter of intent" between the company and plaintiff J.P. Lipson.

The jury found that Lipson was entitled to liquidated damages of $10 million on breach of contract and breach of the covenant of good faith and fair-dealing claims, New Frontier said.

New Frontier said it was pleased that the jury agreed with its position and rejected the plaintiff's claim that the company and its two principal officers violated the Colorado Securities Act.

According to a Jan. 25, 1999, story in Boulder's The Daily Camera, the suit claimed that Lipson, a Colorado pig farmer, was to receive the majority interest in the company as part of a $1.25 million loan he provided to New Frontier. The company had bills it couldn't pay, and would have soon faced bankruptcy without Lipson.

The jury also awarded Lipson $1 million in actual damages and $1 million in punitive damages on his claims for fraudulent inducement and fraudulent concealment.

Both New Frontier chairman Mark Kreloff and executive vice president Michael Weiner were found individually liable for an additional $125,000 in compensatory damages and $125,000 in punitive damages, New Frontier reported.

Despite the judgment, the company said in a prepared statement that it intends to continue distributing both its Pleasure and The Erotic Network adult-PPV networks-which are in more than 20 million addressable households combined-and running its adult Internet businesses.

"The verdict will in no way interrupt the services we provide our customers, nor will it impact the leadership position we have worked hard to earn in our industry," the statement said. "We have a loyal consumer audience and a trusted network of companies we work with, which will not in any way be affected by the case."

The company said it intends to file appropriate post-trial motions and may seek to appeal the verdict. Because the amounts awarded on various claims are alternative remedies, rather than cumulative ones, New Frontier said it expects Lipson to be required to elect between recovery on his fraud or on his contract claims.

The company also noted that the court had not yet entered a judgment in the case. Colorado law provides for a 15-day automatic stay once judgment is entered, and the court has the discretion to impose a further stay.

New Frontier said Lipson sought damages in excess of $25 million on his contract and fraud claims, plus punitive damages.

The verdict could put the network into a financial bind. According to an August quarterly Securities and Exchange Committee filing, the company had assets of $14.7 million.

In a prepared statement, New Frontier said it is exploring "various financing alternatives" to fulfill the terms of the verdict, should it become necessary.

One analyst familiar with the company said that while its long-term business operations show financial promise, it may need help in the short term to come up with cash for the judgment.

"What people are saying is, 'How will the company get the money to meet the judgment?'" said the analyst, who follows the stock but asked not to be named. "They'll have to find someone who will inevitably look for a substantial return on the investment."

New Frontier's statements did not stop its stock from declining last Tuesday. The company's stock had dropped as low as $3 per share-well below the company's opening price of $4.81 and below its previous all-time low of $3.69 set on New Year's Eve. The stock's 52-week high was $12.37.

At press time last Tuesday, the price was $3.63 per share.

New Frontier vice president of communications Keeley Hawk would only say that the sell-off was an "overreaction" by shareholders who were not focused on the "underlying business."

"New Frontier Media is prepared to deal with any eventuality, but our priority is to maintain unimpeded business operations and shareholder support," the company said in a prepared statement.

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