NEW FRONTIER MEDIA INC /CO/ - 10-Q Quarterly Report

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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 June 30, 2003

/ / Transition Report under Section 13 or 15(d) of the Exchange Act.

For the transition period from __________________ to __________________

000-23697
(Commission file number)

NEW FRONTIER MEDIA, INC.
(Exact name of small business issuer as specified in its charter)

Colorado 84-1084061
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

7007 Winchester Circle, Suite 200, Boulder, Co 80301
(Address of principal executive offices)

(303) 444-0900
(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last
report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/

As of August 5, 2003, 19,431,589 shares of Common Stock, par value $.0001, were
outstanding.

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FORM 10-Q
NEW FRONTIER MEDIA, INC.
Index

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN 000S)

ASSETS

The accompanying notes are an integral part of the unaudited consolidated
financial statements.

3

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN 000S)

LIABILITIES AND SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of the unaudited consolidated
financial statements.

4

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000S)

The accompanying notes are an integral part of the unaudited consolidated
financial statements.

5

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000S)

The accompanying notes are an integral part of the unaudited consolidated
financial statements.

6

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The accompanying financial statements have been prepared without audit pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. These statements include all adjustments considered necessary
for a fair presentation of financial position and results of operations. The
financial statements included herein should be read in conjunction with the
financial statements and notes thereto included in the latest annual report on
Form 10-K.

The results of operations for the three-month period ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year.

Business

New Frontier Media, Inc. ("New Frontier Media"), is a publicly traded holding
company for its operating subsidiaries. Colorado Satellite Broadcasting, Inc.
("CSB"), d/b/a The Erotic Networks, ("TEN") is a leading provider of adult
programming to multi-channel television providers and low-powered direct-to-home
households. Through its networks Pleasure, TEN, TEN Clips, TEN Xtsy, TEN Blue,
TEN Blox, TEN Max and TEN BluePlus, TEN is able to provide a variety of editing
styles and programming mixes that appeal to a broad range of adult consumers.

On October 27, 1999, New Frontier Media completed an acquisition of three
related Internet companies: Interactive Gallery, Inc. ("IGI"), Interactive
Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI"). Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company exchanged 6,000,000 shares of restricted common stock in exchange for
all of the outstanding common stock of IGI and ITN and 90% of CTI.

IGI is a leading aggregator and reseller of adult content via the Internet. IGI
aggregates adult-recorded video, live-feed video and still photography from
adult content studios and distributes it via its membership website,
www.ten.com, and Pay-Per-View feeds. In addition, IGI resells its aggregated
content to third-party web masters. ITN and CTI have been inactive since March
31, 2002.

Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of New
Frontier Media, Inc. and its majority owned subsidiaries (collectively
hereinafter referred to as New Frontier Media or the Company). 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 management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates have been made by management in several areas,
including, but not limited to, the realizability of accounts receivable, accrued
restructuring expenses, the valuation of chargebacks and reserves, the valuation
allowance associated with deferred income tax assets and the expected useful
life and valuation of our prepaid distribution rights. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ materially from these estimates.

7

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity"("SFAS No.
150"). This statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. In accordance with the
standard, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. This Statement shall be effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The Company adopted SFAS No. 150 during the quarter ended June
30, 2003 and reclassified its Redeemable Preferred Stock as a liability.

STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB Opinion No. 25") and related interpretations
in accounting for its plans and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB Opinion No. 25, compensation expense
is measured as the excess, if any, of the fair value of the Company's common
stock at the date of the grant over the amount a grantee must pay to acquire the
stock. The Company's stock option plans enable the Company to grant options with
an exercise price not less than the fair value of the Company's common stock at
the date of the grant. Accordingly, no compensation expense has been recognized
in the accompanying consolidated statements of operations for its stock-based
compensation plans.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. Adjustments are made
for options forfeited prior to vesting. The effect on compensation expense, net
income (loss), and net income (loss) per common share had compensation costs for
the Company's stock option plans been determined based on a fair value at the
date of grant consistent with the provisions of SFAS No. 123 for the quarters
ended June 30, 2003 and 2002 is as follows (in thousands, except share data):

8

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- INCOME (LOSS) PER SHARE

The components of basic and diluted income (loss) per share are as follows (in
thousands):

Options and warrants which were excluded from the calculation of diluted
earnings per share because the exercise prices of the options and warrants were
greater than the average market price of the common shares and/or because the
Company reported a net loss during the period were approximately 5,961,000 and
7,098,000 for the quarter ended June 30, 2003 and 2002, respectively. Inclusion
of these options and warrants would be antidilutive.

NOTE 3 -- SEGMENT INFORMATION

The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes reporting and disclosure standards for an enterprise's operating
segments. Operating segments are defined as components of an enterprise for
which separate financial information is available and regularly reviewed by the
Company's senior management.

The Company has the following two reportable segments:

* Subscription/Pay-Per-View ("PPV") TV Group -- distributes branded adult
entertainment programming networks and Video-on-Demand ("VOD") services
through electronic distribution platforms including cable television, C-Band,
and Direct Broadcast Satellite ("DBS")

* Internet Group -- aggregates and resells adult content via the Internet. The
Internet Group sells content to monthly subscribers through its broadband
site, www.ten.com, partners with third-party gatekeepers for the distribution
of www.ten.com, and wholesales pre-packaged content to various webmasters.

The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. Segment profit (loss) is based
on income (loss) before income taxes. The reportable segments are distinct
business units, separately managed with different distribution channels.

The following tables represent financial information by reportable segment (in
thousands):

9

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Expenses related to corporate administration include all costs associated with
the operation of the public holding company, New Frontier Media, Inc., that are
not directly allocable to the Subscription/ PPV TV and Internet operating
segments. These costs include, but are not limited to, legal and accounting
expenses, insurance, registration and filing fees with NASDAQ and the SEC,
investor relation costs, and printing costs associated with the Company's public
filings.

NOTE 4-- MAJOR CUSTOMER

The Company's major customers (revenues in excess of 10% of total sales) are
EchoStar Communications Corporation ("EchoStar") and AOL Time Warner, Inc.
("Time Warner"). EchoStar and Time Warner are included in the
Subscription/Pay-Per-View TV Segment. Revenue from Echostar's DISH Network and
Time Warner as a percentage of total revenue for each of the quarters ended June
30 is as follows:

At June 30, 2003 and March 31, 2003, accounts receivable from EchoStar was
approximately $3,569,000 and $3,462,000, respectively. At June 30, 2003 and
March 31, 2003 accounts receivable from

10

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Time Warner was approximately $711,000 and $606,000, respectively. There were no
other customers with receivable balances in excess of 10% of consolidated
accounts receivable.

The loss of its major customers could have a materially adverse effect on the
Company's business, operating results and/or financial condition.

NOTE 5 -- NOTES PAYABLE

During the quarter ended June 30, 2003, the Company entered into a secured loan
of $400,000 with an unrelated third party. The loan is secured by 930,000 shares
of the Company's common stock. The loan matures on June 30, 2004, and bears
interest at 7.5% per annum payable on a quarterly basis. The holder has the
option to convert the note into common stock at $0.65 per share on the date of
maturity. The Company may prepay the note, in whole or part, at any time without
premium or penalty.

NOTE 6 -- CLASS B REDEEMABLE PREFERRED STOCK

During the quarter ended June 30, 2003, the Company issued 2.5 million shares of
Class B Redeemable Preferred Stock ("Class B") at $0.81 per share. The proceeds
from this offering of $2,000,000 were used to redeem $1.0 million of the
Company's Class A Redeemable Preferred Stock and to fund the purchase and
subsequent retirement of 2,520,750 shares of New Frontier Media, Inc. common
stock as part of the Bonn settlement. The Class B pays dividends of 10% per year
and are payable quarterly in arrears. Shares are subject to mandatory redemption
on or before October 2004, at a redemption price of face value plus accrued
dividends. Prior to such date and so long as such mandatory redemption
obligations have not been discharged in full, no dividends may be paid or
declared upon the Common Stock, or on any other capital stock ranking junior to
or in parity with such Class B Redeemable Preferred Stock. Under certain
circumstances, the Company may redeem the stock, in whole or in part, prior to
the mandatory redemption date. The Company is not entitled to issue any class of
stock that will in effect reduce the value or security of the Class B Preferred.
Each share of preferred shall have the right to vote together with the holders
of the Company's Common stock on a one vote per share basis (and not as a
separate class) on all matters presented to the holders of the Common Stock.

The Class B preferred stock is subject to full or partial early redemption at
the option of the holder if the Company experiences a change in control defined
as (i) a replacement of more than one-half of the members of the Company's board
of directors which is not approved by a majority of those individuals who are
members of the board of directors on the date of the issuance of the preferred
(or by those individuals who are serving as members of the board of directors on
any date whose nomination to the board of directors was approved by a majority
of the members of the board of directors who are members on the date of the
issuance of the preferred), (ii) the merger of the Company with or into another
entity that is not wholly owned by the Company, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, or (iii) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth in (i) or (ii).

NOTE 6 -- LITIGATION

During the fiscal quarter ended March 31, 2003, the Company settled its
litigation with Edward J. Bonn, a former director of the Company, and Jerry
Howard. In connection therewith, Mr. Bonn returned 2.5 million shares of the
Company's common stock and received $1.5 million in cash, 150 internet domain
names and warrants to purchase 350,000 shares at $1.00 a share. The effect of
this transaction was recorded during the quarter ended June 30, 2003, and
reduced equity by approximately $2,100,000.

On June 12, 2003, the Company settled its litigation with Pleasure Productions.
This litigation related to a complaint filed by the Company on August 3, 1999 in
District Court for the city and county of

11

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Denver (Colorado Satellite Broadcasting, Inc. et al. vs. Pleasure Licensing LLC,
et al., case no 99CV4652) against Pleasure Licensing LLC and Pleasure
Productions, Inc. (collectively, "Pleasure"), alleging breach of contract,
breach of express warranties, breach of implied warranty of fitness for a
particular purposes, and rescission, seeking the return of 700,000 shares of New
Frontier Media stock and warrants for an additional 700,000 New Frontier Media
shares which were issued to Pleasure in connection with a motion picture
licensing agreement. In the settlement, the Company secured the exclusive
broadcast rights to 2,000 titles from Pleasure Productions catalog and up to 83
new releases. In addition, Pleasure Productions agreed to the cancellation of
700,000 warrants issued to it in 1999 to purchase New Frontier common stock at
$1.12 a share. As a result of the transaction, the Company reduced the carrying
value of the underlying assets and equity by $1,152,000.

NOTE 7 -- TAXES PAYABLE

No provision for taxes has been made by management as management believes they
will be able to offset net operating losses against any taxable income the
Company may have for the year ending March 31, 2004. At March 31, 2003, the
Company had a net operating loss carry forward of approximately $13,300,000,
which will begin expiring through 2023. During the last three years, issuances
and redemptions of stock and other equity instruments may have effected an
ownership change under Internal Revenue Code Section 382. If an ownership change
is determined to have occured it would likely limit the Company's ability to
utilize any net operating loss carryforwards or credits generated before the
change in ownership.

12

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. These
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
such statements. The words "believe", "expect", "anticipate", "optimistic",
"intend", "will", and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. The Company
undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to: 1) our ability to
compete effectively with our primary Cable/DBS competitor; 2) our ability to
retain our major customers which account for 35% and 13% of our total revenue;
3) our ability to compete effectively for quality content with our Subscription/
PPV TV Group's primary competitor who has significantly greater resources than
us; 4) our ability to successfully manage our credit card chargeback and credit
percentage in order to maintain our ability to accept credit cards as a form of
payment for our products and services; and 5) our ability to retain our key
executives.

The following table reflects the Company's results of operations for the
quarters ended June 30, 2003 and 2002.

RESULTS OF OPERATIONS

NET REVENUE

Net revenue for the Company was $10.1 million and $9.6 million for the quarters
ended June 30, 2003 and 2002, respectively, representing an increase of 5%. The
increase in net revenue for the quarter is due to a 23% increase in net revenue
generated by the Subscription/PPV TV Group, which was offset by a 62% decline in
net revenue from the Internet Group. Net revenue from the Subscription/PPV

13

TV Group increased from $7.0 million for the quarter ended June 30, 2002 to $9.1
million for the quarter ended June 30, 2003, due to increases in the
distribution of the Group's VOD content and its partially edited networks.

OPERATING INCOME (LOSS)

Operating income for the Company increased to $2.2 million for the quarter ended
June 30, 2003 from an operating loss of $4.9 million for the quarter ended June
30, 2002. The increase in operating income for the Company is related to an
increase in operating income generated by the Subscription/ PPV TV Group, a
decrease in corporate administration expenses, and the elimination of
restructuring and impairment expenses incurred by the Internet Group during the
prior year quarter.

Operating income generated by the Subscription/PPV TV Group increased 113% from
$1.6 million for the quarter ended June 30, 2002 to $3.4 million for the quarter
ended June 30, 2003. This increase in operating income is due to an increase in
the Group's gross margin from 51% for the quarter ended June 30, 2002 to 62% for
the quarter ended June 30, 2003, while operating expenses remained relatively
flat year over year for the quarter.

Corporate administration expenses declined from $2.5 million for the quarter
ended June 30, 2002 to $1.3 million for the quarter ended June 30, 2003,
representing a 48% decrease year over year for the quarter. This decline is
primarily related to an 88% decrease in legal fees. Legal fees for the prior
year quarter were unusually high as a result of a proxy fight and related
litigation.

The operating loss for the quarter ended June 30, 2002 included a $3.0 million
restructuring charge taken during the quarter related to relocating the Internet
Group's data center facility and a $0.5 asset impairment charge for the
write-down of certain Internet Group URLs.

SUBSCRIPTION/PAY-PER-VIEW (PPV) TV GROUP

The Subscription/PPV TV Group rebranded its networks under the TEN* name and
logo during the fourth quarter of the fiscal year ended March 31, 2003. Each
network (except Pleasure) has the TEN name associated with it. This change was
done in an effort to create brand recognition for the TEN name and associate
this name with the best adult programming on Cable and DBS platforms. The
networks are now named as follows: Pleasure, TEN, TEN*Clips (formerly ETC),
TEN*Xtsy (formerly Extasy), TEN*BluePlus (formerly True Blue), TEN*Max (formerly
X-Cubed and XClips), TEN*Blue (launched in January 2003), and TEN*Blox (launched
in January 2003). The Subscription/PPV TV Group's VOD service is branded as TEN
On Demand. The following table outlines the current distribution environment and
network households for each network:

(1) % change gives effect to a 29% decline in the C-band market's total
addressable households. Total addressable C-Band households declined from
700,000 as of June 30, 2002 to 500,000 as of June 30, 2003.

(2) The above table reflects network household distribution. A household will be
counted more than once if the home has access to more than one of the
Subscription/PPV TV Group's channels, since each network represents an
incremental revenue stream. The Group estimates its unique

14

household distribution as 11.6 million cable homes and 8.3 million DBS homes
as of June 30, 2003.

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $9.1 million and $7.0
million for the quarters ended June 30, 2003 and 2002, respectively, which
represents an increase of 23% year over year for the quarter. Of total net
revenue, C-Band net revenue was $1.9 million for the quarter ended June 30, 2003
as compared to $2.0 million for the quarter ended June 30, 2002, representing a
decrease of 5%. Revenue from the Group's Cable/DBS services for the quarter
ended June 30, 2003 was $7.2 million as compared to $5.0 million for the quarter
ended June 30, 2002, representing an increase of 44%. Revenue from the Group's
Cable/DBS services is responsible for 79% of the Group's total net revenue for
the quarter ended June 30, 2003, as compared to 71% for the quarter ended June
30, 2002.

The decrease in C-Band revenue for the quarter ended June 30, 2003 is due to the
continued decline of the C-Band market as consumers convert from C-Band "big
dish" analog satellite systems to smaller, 18-inch digital DBS satellite
systems. The C-Band market has decreased 29% since June 30, 2002, from 700,000
addressable subscribers to 500,000 addressable subscribers as of June 30, 2003.
Although the C-Band market has continued its decline, the Subscription/PPV TV
Group's C-Band revenue declined at a much slower rate due to the fact that its
only competitor on this platform went out of business during the current
quarter.

The increase in Cable/DBS revenue is a result of the following changes in
product mix as described in more detail below: 1) an increase in distribution of
the Subscription/PPV TV Group's Video-on Demand ("VOD") service and 2) an
increase in the distribution of the Group's partially edited networks (TEN,
TEN*Clips, TEN*Blue and TEN*Blox).

As of June 30, 2003, the Subscription/PPV TV Group provided its VOD product to
7.0 million VOD enabled cable households, representing an increase in
distribution of 338% over the quarter ended June 30, 2002. Revenue from VOD
increased 979% year over the year for the quarter and now represents 21% of
total Cable/DBS revenue for the quarter ended June 30, 2003. The Subscription/
PPV TV Group's VOD content is currently available to over 95% of all VOD enabled
households where adult content is deployed, and is the only adult VOD content
available to 80% of those households.

The Subscription/PPV TV Group began to provide its VOD service to On Command
Corporation ("On Command") during the quarter ended June 30, 2003. On Command is
the leading provider of in-room interactive entertainment to the hotel industry,
providing content to 895,000 hotel rooms in the U.S. Revenue from On Command
represented 10% of the Subscription/PPV TV Group's Cable/ DBS revenue for the
quarter ended June 30, 2003.

The Subscription/PPV TV Group is beginning to see a growing acceptance by
consumers for its partially edited networks - TEN, TEN*Clips ("Clips"), TEN*Blue
("Blue") and TEN*Blox ("Blox"). For example, in July 2003 the Subscription/PPV
TV Group announced a new four-channel deal with AOL Time Warner, Inc. ("Time
Warner"). This deal allows each Time Warner affiliate to add TEN, Clips, Blue
and/or Blox to its system. The Subscription/PPV TV Group expects to add an
average of three partially edited networks to each Time Warner system during the
third quarter of its fiscal year. In addition, the Group expects its Pleasure
network to be removed from some of these same Time Warner systems.

Revenue from the Subscription/PPV TV Group's partially edited networks -- TEN,
Clips, Blue and Blox -- increased 28% year over year for the quarter due to the
growing acceptance for this editing standard.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $3.5 million, or 38% of
revenue, for the quarter ended June 30, 2003, as compared to $3.4 million, or
49% of revenue, for the quarter ended June 30, 2002, representing a slight
increase of 3%.

15

Cost of sales consists of expenses associated with broadcast operations,
satellite uplinking, satellite transponder leases, programming acquisition,
in-house editing and programming, amortization of content licenses, and the
Subscription/PPV TV Group's in-house call center operations.

The increase in cost of sales year over year for the quarter is due to: a) an
increase in broadcast operation costs related to additional resources required
to provide the Subscription/PPV TV Group's VOD service and b) the addition of an
in-house editing and programming department dedicated to the Group's Blue and
Blox networks and to the VOD content provided to On Command. The increase in
these costs was offset by a 16% decrease in quarterly transponder costs and a
23% decrease in costs related to the Subscription/PPV TV Group's in-house call
center.

OPERATING INCOME

Operating income generated by the Subscription/PPV TV Group for the quarter
ended June 30, 2003 was $3.4 million as compared to operating income of $1.6
million for the quarter ended June 30, 2002, representing an increase of 113%.

The increase in operating income for the quarter ended June 30, 2003 is due to
an increase in gross margin while operating expenses remained relatively flat.
Gross margin increased from 51% for the quarter ended June 30, 2002 to 62% for
the quarter ended June 30, 2003. Operating expenses as a percentage of revenue
declined from 29% of revenue as of the quarter ended June 30, 2002 to 23% of
revenue for the quarter ended June 30, 2003. Operating expenses increased
slightly by 5% year over year for the quarter due to an increase in trade show
expenses for a show that usually occurs in the fourth quarter.

INTERNET GROUP

NET REVENUE

Total net revenue for the Internet Group was $1.0 million for the quarter ended
June 30, 2003, as compared to $2.6 million for the quarter ended June 30, 2002,
representing a decrease of 62%. The Internet Group's revenue is comprised of
membership revenue from its consumer-based web site, revenue from the sale of
its content feeds, and revenue from the sale of exit traffic.

Net membership revenue for the Internet Group was $0.8 million for the quarter
ended June 30, 2003, as compared to net membership revenue of $1.7 million for
the quarter ended June 30, 2002, which represents a decrease of 53%. The
Internet Group has seen a further decline in its net membership revenue due to a
change in its business model. As of March 31, 2003, the Internet Group
transferred 150 of its domain names to Edward Bonn as part of the settlement of
the Company's lawsuit with him. At the same time, the Internet Group merged all
of its dial-up web sites (and corresponding members) into its premiere broadband
site, www.ten.com. The transfer of these URLs, coupled with the Group's policy
to cease purchasing traffic, has resulted in a substantial decrease in the
number of new monthly members.

The Internet Group advertises its web site on the Subscription/PPV TV Group's
networks in order to drive type-in traffic to the site. However, the Internet
Group expects to see continued erosion of its recurring membership revenue since
the current monthly traffic volume to www.ten.com does not generate enough new
monthly sign-ups to offset the churn of its renewing membership base. It is
important to note that the Internet Group does not consider the monthly
membership model to be the focus of its future growth plans.

The Internet Group's current focus for growth is on forming revenue sharing
partnerships with third party gatekeepers such as cable companies, hospitality
providers, and portals, for the distribution of ten.com, whereby it can gain
direct access to consumers in search of adult entertainment.

Revenue from the Internet Group's sale of content was $0.2 million for the
quarter ended June 30, 2003, as compared to $0.4 million for the quarter ended
June 30, 2002, representing a decrease of 50%. This decrease in revenue from the
sale of content is due to a softening in demand for content by third-party
webmasters. Webmasters are decreasing their reliance on outside sources for
content and demanding lower prices for the content that they do purchase. The
continued reluctance on the part of webmasters to pay for content makes this a
difficult market segment in which to compete.

16

Revenue was earned from traffic sales by forwarding exit traffic and traffic
from selected vanity domains to affiliate webmaster marketing programs,
monetizing foreign traffic via international dialer companies, marketing
affiliated webmaster sites through the Internet Group's double opt-in email
list, and by directing traffic to its pay-per-click (PPC) search engine,
www.sexfiles.com. Revenue from the sale of traffic was $0 and $0.5 million for
the quarters ended June 30, 2003 and 2002, respectively. Due to the change in
its business model as described above, the Internet Group has ceased all traffic
sales activity as a result of the decline in traffic to its web site.

COST OF SALES

Cost of sales for the Internet Group was $0.4 million for the quarter ended June
30, 2003, as compared to $1.8 million for the quarter ended June 30, 2002,
representing a decrease of 78%. Cost of sales consist of expenses associated
with credit card processing, bandwidth, membership acquisition costs (purchase
of traffic), web site content costs, and depreciation and amortization of
assets.

Cost of sales was 40% and 69% of total net revenue for the quarters ended June
30, 2003 and 2002, respectively.

Cost of sales has decreased year over year for the quarter due to a decline in
traffic acquisition costs from $0.2 million to $0, a 50% decline in bandwidth
costs, a 72% decrease in the variable costs related to credit card processing, a
decrease in web site content costs, and a decrease in depreciation and
amortization costs related to the Internet Group's data center. The Internet
Group relocated its data center functions from Los Angeles to Boulder during the
2003 fiscal year (see "Restructuring Expenses" below). This restructuring
resulted in a 78% decrease in depreciation, amortization, equipment lease, and
maintenance costs, from $0.9 million during the quarter ended June 30, 2002 to
$0.2 million for the quarter ended June 30, 2003, due to the write-off of excess
equipment and impaired assets.

OPERATING INCOME (LOSS)

Operating income (loss) for the Internet Group was operating income of $0.1
million for the quarter ended June 30, 2003 as compared to an operating loss of
$0.5 million for the quarter ended June 30, 2002. Operating expenses were 50% of
net revenue for the quarters ended June 30, 2003 and 2002. Total operating
expenses decreased 62% from the quarter ended June 30, 2002.

The decrease in operating expenses for the quarter ended June 30, 2003 is due to
a decrease in payroll, benefits, and other office expenses related to all
departments. The Internet Group completed a final restructuring during the
fourth quarter of its fiscal year ended March 31, 2003, which resulted in a
decrease in sales, marketing, data center and web production personnel.

RESTRUCTURING EXPENSES

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
to move its data center operations from Los Angeles to Boulder. Total
restructuring charges of $3.0 million related to this plan were recorded during
the quarter ended June 30, 2002, of which $28,000 related to the termination of
10 employees. Also included in this charge was $0.3 million related to the data
center space in Sherman Oaks that the Company is attempting to sublet and $2.7
million of expenses related to excess computer equipment.

ASSET IMPAIRMENT CHARGES

During the quarter ended June 30, 2002, the Company recognized impairment losses
on certain URLs of approximately $535,000 in connection with the Internet Group.
Management identified certain conditions, including a declining gross margin due
to the availability of free adult content on the Internet and decreased traffic
to the Company's URLs, as indicators of asset impairment. These conditions led
to operating results and forecasted future results that were substantially less
than had been anticipated at the time of the Company's acquisition of the
Internet Group. The Company revised its projections and determined that the
projected results would not fully support the future amortization of the URLs.
In accordance with the Company's policy, management assessed the recoverability
of the URLs using a cash flow projection based on the remaining amortization
period of

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four years. Based on this projection, the cumulative cash flow over the
remaining amortization period was insufficient to fully recover the intangible
asset balance.

CORPORATE ADMINISTRATION

Expenses related to corporate administration include all costs associated with
the operation of the public holding company, New Frontier Media, Inc., that are
not directly allocable to the Subscription/ PPV TV and Internet operating
segments. These costs include, but are not limited to, legal and accounting
expenses, insurance, registration and filing fees with NASDAQ and the SEC,
investor relations costs, and printing costs associated with the Company's
public filings.

Corporate administration expenses were $1.3 million and $2.5 million for the
quarters ended June 30, 2003 and 2002, respectively, representing a decrease of
48%. The decrease in corporate administration expenses for the quarter ended
June 30, 2003 is due to an 88% decrease in legal fees related to the settlement
of the Company's lawsuit with Edward Bonn, Bradley Weber, Jerry Howard and
Response Telemedia, Inc. which was ongoing during the fiscal year ended March
31, 2003. Legal fees for the quarter ended June 30, 2003 included the
reimbursement of $166,000 as part of a settlement agreement reached during the
quarter.

OTHER EXPENSE

Other expense decreased from $0.7 million for the quarter ended June 30, 2002 to
$0.2 million for the quarter ended June 30, 2003, representing a 71% decrease.
This decrease is a result of two non-recurring items incurred during the quarter
ended June 30, 2002: 1) an $117,500 write down in value of the Company's
investment in Metro Global Media, Inc. ("Metro") stock and 2) the write-off of
$187,000 in non-cash debt offering costs related to the early repayment of the
Company's debt obligations.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended June 30, 2003, cash provided by operating activities was
$2.6 million. Cash provided by operating activities was primarily attributable
to net income for the quarter of $2.0 million adjusted for depreciation and
amortization of $1.6 million and other non-cash related items. Accounts
receivable for the quarter increased by $0.8 million, prepaid distribution
rights related to the licensing of the Company's content increased $0.4 million
and accounts payable declined $0.5 million for the quarter.

Cash used in investing activities was $0.2 million for both quarters ended June
30, 2003 and 2002. Cash used in investing activities for the quarter ended June
30, 2003 was primarily related to purchases by the Subscription/PPV TV Group of
broadcast equipment, including descrambling equipment necessary for new cable
launches and increased storage capacity, as well as to upgrades to the Company's
technology facility to be completed during the current fiscal year. Cash used in
investing activities for the quarter ended June 30, 2002 was primarily related
to the purchase of software licenses, a security system for the Company's new
headquarters in Boulder, and minor equipment upgrades to the Subscription/PPV TV
Group's digital broadcast facility.

Cash used in financing activities for the quarter ended June 30, 2003 was $0.6
million as compared to cash provided by financing activities of $0.2 million for
the quarter ended June 30, 2002. Cash used in financing activities for the
current year quarter was related to the purchase and subsequent retirement of
2.5 million shares of New Frontier Media, Inc. stock acquired from Edward Bonn
for $1.5 million as part of the settlement of the Company's lawsuit with him
during the quarter and $0.3 million in capital lease obligations. This cash used
in financing activities was offset by an increase in borrowings of $0.4 million
and a net increase in Redeemable Preferred Stock of $0.8 million.

During the current year quarter, the Company issued 2.5 million shares of Class
B Redeemable Preferred Stock at $0.81 per share. The proceeds from this offering
were used to redeem $1.3 million of the Company's Class A Redeemable Preferred
Stock and to fund the purchase and subsequent retirement of 2.5 million shares
of New Frontier Media, Inc. common stock. The Class B Redeemable Preferred Stock
pays dividends at 10% on a quarterly basis and is redeemable at the Company's
option until October 2004.

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Cash provided by financing activities for the quarter ended June 30, 2002 was
related to the issuance of 1.4 million shares of Class A Redeemable Preferred
Stock at $2.00 per share. The proceeds from this offering were used to repay
$2.0 million of the Company's outstanding notes payable. An additional $1.0
million in debt was converted to 0.5 million shares of Class A Redeemable
Preferred Stock during the quarter ended June 30, 2002. The Class A Redeemable
Preferred Stock pays dividends at 15.5% on a monthly and quarterly basis and is
redeemable anytime at the Company's option until January 2004, by which time it
must be redeemed. The Company currently has 1.0 million shares of Class A
Redeemable Preferred Stock outstanding. Cash provided by financing activities
was offset by $0.4 million in payments made during the quarter on the Company's
capital lease obligations.

The Company expects to fund the dividends due on the Class A and B Redeemable
Preferred Stock from its cash flows from operations. The Company anticipates
funding the redemption of the Redeemable Preferred Stock in January and October
2004 from its cash flows from operations or by a refinancing of the obligations
prior to the redemption dates. In the event the Class A and B Redeemable
Preferred Stock should become due by reason of a change in control, the
Company's liquidity and capital resources is likely to be materially and
adversely impaired. If New Frontier Media were to lose its major customers that
account for 35% and 13% of its revenue, its ability to finance its operating
requirements would be severely impaired. The Company believes that its existing
cash balances and cash generated from operations will be sufficient to satisfy
its operating requirements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. The Company's exposure to market risk is principally confined to
cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.

Interest Rate Sensitivity. As of June 30, 2003, the Company had cash in checking
and money market accounts. Because of the short maturities of these instruments,
a sudden change in market interest rates would not have a material impact on the
fair value of these assets. Furthermore, the Company's borrowings are at fixed
interest rates, limiting the Company's exposure to interest rate risk.

Foreign Currency Exchange Risk. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its Securities and Exchange
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its
President and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, as the Company's are designed to
do, and management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.

During the 90-day period prior to the date of this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the President and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the President and Chief Financial
Officer concluded that the Company's controls and procedures were effective.

Subsequent to the date of this evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and no corrective actions taken with regard
to significant deficiencies or material weaknesses in such controls.

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PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

31.01 Certification by President Michael Weiner pursuant to U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02 Certification by CFO Karyn Miller pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01 Certification by President 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 Karyn Miller pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

b) Reports on Form 8-K

On June 12, 2003, the Company filed a Form 8-K for the release of its fourth
quarter earnings.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.

NEW FRONTIER MEDIA, INC.

/s/ Karyn L. Miller
Karyn L. Miller
Chief Financial Officer
(Principal Accounting Officer)
Dated: August 11, 2003

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