NEW FRONTIER MEDIA INC - 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 September 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 November 3, 2003, 20,504,679 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
CONDENSED 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
CONDENSED 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
CONDENSED 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

CONDENSED 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 six-month period ended September 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. 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

PRINCIPALS 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. Upon adoption of SFAS No. 150 the Company 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 September 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 were approximately
3,396,000 and 3,525,000 for the quarter and six months ended September 30, 2003,
respectively. Options and warrants which were excluded from the calculation of
diluted earnings per share because the Company reported a net loss during the
period were approximately 6,637,00 for the quarter and six months ended
September 30, 2002. 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,
Direct Broadcast Satellite ("DBS"), and hotels

* 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 minority interest and 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 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 and six months ended September 30 is
as follows:

10

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At September 30, 2003 and March 31, 2003, accounts receivable from EchoStar was
approximately $3,278,000 and $3,462,000, respectively. At September 30, 2003 and
March 31, 2003 accounts receivable from Time Warner was approximately $741,000
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 matures on May 29, 2004, and
bears interest at 7.5% per annum payable on a quarterly basis. The loan is
secured by 930,000 shares of the Company's common stock. The loan was amended to
delete a clause to convert the note into common stock at $0.65 per share on the
date of maturity. The Company may repay the note, in whole or part, at any time
without premium or penalty.

NOTE 6 -- 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 at 10% per year
payable on a quarterly basis. 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).

11

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- TAXES PAYABLE

No provision for taxes has been made 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 have effected ownership changes under
Internal Revenue Code Section 382. However, based on the study being performed,
management estimates that the amount of projected taxable income will not exceed
the estimated net operating losses available under IRC 382.

NOTE 8 -- 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, 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 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 for an amount that approximates the value of the warrants.

NOTE 9 -- SUBSEQUENT EVENTS

In October 2003, the Company redeemed $500,000 of Class B Redeemable Preferred
Stock.

In October 2003, the Company executed an employment contract with TEN's
President. The employment contract expires in March 2005.

Commitments under this obligation are as follows:

YEAR ENDED MARCH 31,
--------------------
2004 $310,200
2005 $310,200

Additionally, if certain financial criteria are met, an additional $75,000 in
bonus could be paid in both fiscal years 2004 and 2005, as well as discretionary
bonuses.

In November 2003, the Company redeemed the remaining $1,500,000 of Class B
Redeemable Preferred Stock.

12

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

FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. These
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
such statements. The words "believe", "expect", "anticipate", "optimistic",
"intend", "will", and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. The Company
undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to: 1) our ability to
compete effectively with our primary Cable/ DBS competitor; 2) our ability to
retain our major customers which account for 35% and 14% of our total revenue;
3) our ability to compete effectively for quality content with our Subscription/
PPV TV Group's primary competitor; 4) our ability to successfully manage our
credit card chargeback and credit percentages in order to maintain our ability
to accept credit cards as a form of payment for our products and services; and
5) our ability to retain our key executives.

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

RESULTS OF OPERATIONS

NET REVENUE

Net revenue for the Company was $10.9 million and $21.0 million for the quarter
and six months ended September 30, 2003, respectively, as compared to $9.3
million and $18.9 million for the quarter and six months ended September 30,
2002, representing increases of 17% and 11%, respectively.

The increase in net revenue for both the quarter and six months ended September
30, 2003 is related to an increase in revenue generated by the Subscription/PPV
TV Group. Net revenue generated by the Subscription/PPV TV Group increased to
$10.1 million and $19.2 million for the quarter and six months ended September
30, 2003, respectively, as compared to revenue of $7.1 million and $14.1

13

million for the quarter and six months ended September 30, 2002, respectively,
representing increases of 42% and 36%, respectively. This increase in revenue
was offset by a decline in revenue generated by the Internet Group. Revenue from
the Internet Group decreased to $0.8 million and $1.8 million for the quarter
and six months ended September 30, 2003, respectively, as compared to $2.2
million and $4.8 million for the quarter and six months ended September 30,
2002, respectively.

OPERATING INCOME (LOSS)

Operating income for the Company increased to $3.1 million and $5.3 million for
the quarter and six months ended September 30, 2003, as compared to operating
losses of $0.7 million and $5.6 million for the quarter and six months ended
September 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
six months ended September 30, 2002.

Operating income generated by the Subscription/PPV TV Group increased to $4.3
million and $7.7 million for the quarter and six months ended September 30,
2003, respectively, as compared to $1.4 million and $3.0 million for the quarter
and six months ended September 30, 2002, respectively, representing increases of
207% and 157%, respectively. The increase in operating income for the quarter
and six months ended September 30, 2003 is related to an increase in gross
margins while operating expenses remained relatively flat.

Corporate administration expenses declined to $1.1 million and $2.4 million for
the quarter and six months ended September 30, 2003, respectively, from $2.1
million and $4.6 million for the quarter and six months ended September 30,
2002, respectively, representing decreases of 48% for both the quarter and
six-month period. The decrease in corporate administration expenses for the
quarter and six months ended September 30, 2003 is due primarily to a 93% and
90% decrease in legal fees. Legal fees were higher during the prior fiscal year
due to the proxy fight and its associated litigation.

The operating loss for the six months ended September 30, 2002, included a $3.0
million restructuring charge taken during the first quarter of that fiscal year
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 available 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:

14

(1) % change gives effect to a 33% decline in the C-band market's total
addressable households. Total addressable C-Band households declined
from 0.6 million as of September 30, 2002 to 0.4 million as of
September 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 Subscription/ PPV TV
Group estimates its unique household distribution as 12.8 million cable
homes and 8.8 million DBS homes as of September 30, 2003.

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $10.1 million for the
quarter ended September 30, 2003, representing a 42% increase from $7.1 million
for the quarter ended September 30, 2002. Of total net revenue, C-Band net
revenue was $1.7 million for the quarter ended September 30, 2003 as compared to
$1.9 million for the quarter ended September 30, 2002, representing a decrease
of 11%. Revenue from the Group's Cable/DBS/Hotel services was $8.4 million for
the quarter ended September 30, 2003 as compared to $5.2 million for the quarter
ended September 30, 2002, representing a 62% increase. Revenue from the Group's
Cable/DBS/Hotel services is responsible for 83% of the Group's total net revenue
for the quarter ended September 30, 2003, as compared to 73% for the quarter
ended September 30, 2002.

Total net revenue for the Subscription/PPV TV Group was $19.2 million for the
six months ended September 30, 2003, representing a 36% increase from $14.1
million for the six months ended September 30, 2002. Of total net revenue,
C-Band net revenue was $3.6 million for the six months ended September 30, 2003
as compared to $3.9 million for the six months ended September 30, 2002,
representing a decrease of 8%. Revenue from the Group's Cable/DBS/Hotel services
for the six months ended September 30, 2003 was $15.6 million as compared to
$10.2 million for the six months ended September 30, 2002, representing an
increase of 53%. Revenue from the Group's Cable/DBS/ Hotel services is
responsible for 81% of the Group's total net revenue for the six months ended
September 30, 2003, as compared to 72% for the six months ended September 30,
2002.

The decrease in C-Band revenue for the quarter and six months ended September
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 33% since
September 30, 2002, from 0.6 million addressable subscribers to 0.4 million
addressable subscribers as of September 30, 2003. Although the C-Band market has
continued to decline, the Subscription/PPV TV Group's C-Band revenue has
declined at a much slower rate due to the fact that its only competitor on this
platform went out of business during the first quarter of the current fiscal
year.

The increase in Cable/DBS/Hotel revenue is a result of an increase in
distribution of the Subscription/ PPV TV Group's Video-on Demand ("VOD") service
on both cable and hotel platforms. As of September 30, 2003, the
Subscription/PPV TV Group provided its VOD service to 8.0 million VOD enabled
cable households, representing an increase in cable distribution of 167%
year-over-year, as well as to approximately 900,000 hotel rooms in the U.S. and
Canada. Revenue from VOD services increased 1152% and 1267% for the quarter and
six months ended September 30, 2003, respectively, as a result of new launches,
and now represents 39% and 35% of total Cable/DBS/Hotel revenue for the quarter
and six months ended September 30, 2003, respectively.

As stated in the Company's Critical Accounting Policies on Revenue Recognition,
cable affiliates do not report actual monthly sales for each of their systems to
the Subscription/PPV TV Group until 45 - 60 days after each month. This practice
requires management to make monthly revenue estimates based on the historical
experience for each affiliated system. Historically, any differences between the
amounts estimated and the actual amounts have been immaterial due to the overall
predictability of pay-per-view revenues.

Since VOD is such a new product, the revenue expected from new VOD cable
affiliates can be more difficult to predict. The Subscription/PPV TV Group
intends to continue to be conservative in estimating the impact of the rollout
of VOD households in individual quarters while continually adjusting our
estimates to reflect actual revenue remitted.

15

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $4.0 million, or 40% of
revenue, for the quarter ended September 30, 2003, as compared to $3.5 million,
or 49% of revenue, for the quarter ended September 30, 2002, an increase of 14%.
Cost of sales for the Subscription/PPV TV Group was $7.5 million or 39% of
revenue for the six months ended September 30, 2003, as compared to $6.9 million
or 49% of revenue for the six months ended September 30, 2002, an increase of
9%.

Cost of sales consists of expenses associated with broadcast playout, satellite
uplinking, satellite transponder leases, programming acquisition costs, in-house
editing and programming, VOD transport costs, amortization of content licenses,
and the Subscription/PPV TV Group's in-house call center operations for its
C-Band business.

The increase in cost of sales for the quarter and six months is due to: a) an
increase in transport costs related to the delivery of VOD content to cable
customers 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 29% and 22% decrease
in quarterly and year-to-date transponder costs and a 26% and 25% quarterly and
year-to-date decrease in costs related to the Subscription/PPV TV Group's
in-house call center.

OPERATING INCOME

Operating income for the Subscription/PPV TV Group for the quarter ended
September 30, 2003 was $4.3 million as compared to operating income of $1.4
million for the quarter ended September 30, 2002, representing an increase of
207%. Operating income for the Subscription/PPV TV Group for the six months
ended September 30, 2003 was $7.7 million as compared to operating income of
$3.0 million for the six months ended September 30, 2002, representing an
increase of 157%.

The increase in operating income for the quarter and six months ended September
30, 2003 is related to an increase in gross margin while operating expenses
remained relatively flat. The Subscription/PPV TV Group's gross margin increased
from 51% for the quarter and six months ended September 30, 2002 to 60% and 61%
for the quarter and six months ended September 30, 2003, respectively.

Operating expenses were 19% and 21% of revenue for the quarter and six months
ended September 30, 2003, respectively, as compared to 30% and 29% of revenue
for the quarter and six months ended September 30, 2002, respectively. Operating
expenses declined 18% and 5% for the quarter and six months ended September 30,
2003. This quarterly and year-to-date decline in operating expenses is primarily
related to the Subscription/PPV TV Group's decision during the current fiscal
year quarter to no longer market its C-Band services through its open-air barker
channel as well as to a decline in trade show expenses incurred for the quarter
and six months ended September 30, 2003.

INTERNET GROUP
NET REVENUE

Total net revenue for the Internet Group was $0.8 million for the quarter ended
September 30, 2003, as compared to $2.2 million for the quarter ended September
30, 2002, representing a decrease of 64%. Total net revenue for the Internet
Group was $1.8 million for the six months ended September 30, 2003, as compared
to $4.8 million for the six months ended September 30, 2002, representing a
decrease of 63%. 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 $0.6 million and $1.4 million
for the quarter and six months ended September 30, 2003, as compared to net
membership revenue of $1.5 million and $3.2 million for the quarter and six
months ended September 30, 2002, which represents a decrease of 60% and 56%,
respectively. The Internet Group has continued to see a decline in its net
membership revenue due to the change made to its business model at the end of
the prior fiscal year. In addition, 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 has resulted in a substantial
decrease in traffic and, consequently, the number of new monthly members to its
site.

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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. The Group no longer
purchases any traffic from other webmasters. 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. However, 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 www.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 and $0.4
million for the quarter and six months ended September 30, 2003, as compared to
$0.3 million and $0.7 million for the quarter and six months ended September 30,
2002, representing decreases of 33% and 43%, respectively. This decrease in
revenue from the sale of content for the quarter and six months ended September
30, 2003 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.

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.
Revenue from the sale of traffic was $0 for the quarter and six months ended
September 30, 2003 respectively, as compared to $0.4 million and $0.9 million
for the quarter and six months ended September 30, 2002, respectively. Due to
the change in its business model as described above, the Internet Group has
ceased all traffic sales activity due to the decline in traffic to its web site.

COST OF SALES

Cost of sales for the Internet Group was $0.3 million, or 38% of revenue for the
quarter ended September 30, 2003, as compared to $1.0 million, or 45% of
revenue, for the quarter ended September 30, 2002, representing a decrease of
70%. Cost of sales for the Internet Group was $0.7 million, or 39% of revenue
for the six months ended September 30, 2003, as compared to $2.8 million, or 58%
of revenue, for the six months ended September 30, 2002, representing a decrease
of 75%. Cost of sales consists of expenses associated with credit card fees,
merchant banking fees, bandwidth, membership acquisition costs (purchase of
traffic), web site content costs, and depreciation of assets.

Cost of sales has decreased for the quarter and six months ended September 30,
2003 due to a decline in traffic acquisition costs, bandwidth costs, variable
costs related to credit card processing, 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 72% and 82% decrease in depreciation,
amortization, equipment lease, and maintenance costs for the quarter and six
months ended September 30, 2003, respectively, due to the write-off of excess
equipment and impaired assets.

OPERATING INCOME (LOSS)

Operating income for the Internet Group was $0 for the quarter ended September
30, 2003, as compared to $0.1 million for the quarter ended September 30, 2002.
Operating income (loss) for the Internet Group was operating income of $0.1
million for the six months ended September 30, 2003, as compared to an operating
loss of $0.4 million for the six months ended September 30, 2002.

The decline in operating income for the quarter ended September 30, 2003 is
related to a 64% decline in revenue year-over-year for the quarter that was
partially offset by declines in costs of sales and operating expenses. Gross
margin improved to 63% for the quarter ended September 30, 2003, as compared to
gross margin of 55% for the quarter ended September 30, 2002. Operating expenses
declined from $1.1 million for the quarter ended September 30, 2002 to $0.5
million for the quarter ended September 30, 2003, representing a decrease of
55%. The decrease in operating expenses is

17

related 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.

The increase in operating income for the six months ended September 30, 2003 is
related to improved gross margins as a result of the data center restructuring
completed during the quarter ended June 30, 2002 and a decrease in operating
expenses related to the restructuring completed during the fourth quarter ended
March 31, 2003. The effect of these restructurings was to improve the Internet
Group's gross margin to 61% for the six months ended September 30, 2003, from
42% for the six months ended September 30, 2002, and to decrease operating
expenses by 58% for the six months ended September 30, 2003. Operating expenses
declined to $1.0 million for the six months ended September 30, 2003 from $2.4
million for the six months ended September 30, 2002. This decline in operating
expenses is related to a decrease in payroll, benefits and other office expenses
related to all departments.

RESTRUCTURING EXPENSES

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
with respect to the Internet Group's data center facility. The Company closed
the Internet Group's in-house data center in Sherman Oaks, California and moved
its servers, bandwidth and content delivery to the same location as the
Subscription/PPV TV Group's digital broadcast facility in Boulder, Colorado.
Total restructuring charges of $3.1 million related to this plan were recorded
during the six months ended September 30, 2002, of which $28,000 related to the
termination of 10 employees. Also included in this charge was $0.4 million
related to the data center space in Sherman Oaks that the Company is attempting
to sublet and $2.6 million of expenses related to excess equipment.

During the quarter ended September 30, 2002, the Internet Group increased the
amount of its restructuring expense accrued during the fourth quarter of the
prior fiscal year by $0.3 million due to an adjustment to the estimate used in
computing the expense related to its excess space. The change in the estimate
was related to an extension of the time necessary to sublet the space. Future
adjustments to this accrual may be required if the space is not sublet when
expected. In addition, the restructuring expense for this same period was
decreased by $0.1 million during the current fiscal quarter for a change in the
amount estimated for certain payroll related expenses.

During the quarter ended September 30, 2003, the Internet Group incurred $0.1
million in additional restructuring costs related to equipment that had been
written off as part of the restructuring charges taken during fiscal years 2002
and 2003. These expenses were primarily related to buyouts and assumptions of
leased equipment that were written off in previous years.

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
Division. Management identified certain conditions including a declining gross
margin due to the availability of free adult content on the Internet and
decreased traffic to the Company's URLs as indicators of asset impairment. These
conditions led to operating results and forecasted future results that were
substantially less than had been anticipated at the time of the Company's
acquisition of the Internet business. The Company revised its projections and
determined that the projected results would not fully support the future
amortization of the URLs associated with Internet business. In accordance with
the Company's policy, management assessed the recoverability of the URLs using a
cash flow projection based on the remaining amortization period of four years.
Based on this projection, the cumulative cash flows over the remaining
amortization period were insufficient to fully recover the intangible asset
balance, and the Company recorded an impairment charge by writing down the URLs.

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.

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Corporate administration expenses were $1.1 and $2.1 million for the quarters
ended September 30, 2003 and 2002, respectively, representing a decrease of 48%.
Corporate administration expenses were $2.4 and $4.6 million for the six months
ended September 30, 2003 and 2002, respectively, representing a decrease of 48%.

The decrease in corporate administration expenses for the quarter and six months
ended September 30, 2003 is due primarily to a 93% and 90% decrease in legal
fees for the quarter and six months ended September 30, 2003, respectively.
Legal fees were higher during the prior fiscal year due to the proxy fight and
its associated litigation. Legal fees for the six months ended September 30,
2003 included the reimbursement of $166,000 as part of a settlement agreement
reached during the first fiscal year quarter.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended September 30, 2003, cash provided by operating
activities was $6.3 million. Cash was provided by net income of $4.9 million
adjusted for depreciation and amortization of $3.2 million and other non-cash
related items. Accounts receivable increased by $1.1 million, prepaid
distribution rights related to the licensing of the Company's content increased
$1.1 million and accounts payable declined $0.7 million for the period.

Cash used in investing activities was $0.3 million for the six months ended
September 30, 2003 and 2002. Cash used in investing activities for the six
months ended September 30, 2003 was primarily related to purchases by the
Subscription/PPV TV Group of broadcast equipment, including a new broadcast
cluster to allow for increased redundancy, encrypting 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 six months ended September 30,
2002 was primarily related to the purchase of software licenses, minor equipment
upgrades to the Subscription/PPV TV Group's digital broadcast facility and the
purchase of encrypting equipment for new cable launches.

Cash used in financing activities was $2.3 million for the six months ended
September 30, 2003 as compared to $0.3 million for the six months ended
September 30, 2002. Cash used in financing activities for the six months ended
September 30, 2003 is related to $0.7 million paid on the Company's capital
lease obligations, the repayment of $3.8 million of the Company's Class A
Redeemable Preferred Stock, and 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. This
use of cash was offset by the issuance of 2.5 million shares of Class B
Redeemable Preferred Stock at $0.81 per share, the receipt of $1.3 million in
proceeds from the exercise of stock options and warrants, and an increase in net
borrowings of $0.4 million.

Cash used in financing activities for the six months ended September 30, 2002
was related to $1.0 million paid on the Company's capital lease obligations.
This use of cash was offset by the issuance of 1.4 million shares of Class A
Redeemable Preferred Stock at $2.00 per share. The proceeds from this offering
were used to repay $2.0 million of the Company's outstanding notes payable. An
additional $1.0 million in debt was converted to 0.5 million shares of Class A
Redeemable Preferred Stock during the six months ended September 30, 2002.

As of September 30, 2003, the Company had fully redeemed its Class A Redeemable
Preferred Stock and had $2.0 million of its Class B Redeemable Preferred Stock
outstanding. The Class B Redeemable Preferred Stock pays dividends at 10% on a
quarterly basis and is redeemable at the Company's option no later than October
2004. The Company redeemed $2.0 million of the Class B Redeemable Preferred
Stock after September 30, 2003.

If New Frontier Media were to lose its major customers that account for 35% and
14% 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Sensitivity. As of September 30, 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.

As required by the SEC rules, we have evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report. This evaluation was performed
under the supervision and with the participation of the Company's management,
including the President and Chief Financial Officer. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Company held an annual meeting of its shareholders on August 26, 2003
(the "Annual Meeting").

(b) The Annual Meeting involved the election of directors. The directors elected
at the meeting were Michael Weiner, Alan L. Isaacman, Hiram J. Woo, David
Nicholas, Melissa Hubbard and Dr. Skender Fani.

(c) Three matters were voted on at the Annual Meeting, as follows:

(i) The election of six directors to the Board of Directors for the
following year and until their successors are elected.

The votes were cast for this matter as follows:

(ii) The approval of an amendment to the Company's Millennium Incentive
Stock Option Plan to permit the grant of restricted stock thereunder.

(iii) The ratification of the appointment of Grant Thornton LLP as the
Company's independent auditors for the fiscal year ending March 31,
2004.

The votes were cast for this matter as follows:

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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

99.00 Employment Agreement between Ken Boenish and Colorado Satellite
Broadcasting, Inc.

b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2003.

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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: November 7, 2003

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