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

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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, 2002

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

For the transition period from __________________ to __________________

000-23697
(Commission file number)

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

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

7007 Winchester Circle, Suite 200, Boulder, Co 80301

(Address of principal executive offices)

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

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

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

As of August 5, 2002, 21,322,816 shares of Common Stock, par value $.0001, were
outstanding.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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 COMPREHENSIVE INCOME (LOSS)
IN (000'S)

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

6

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.

7

NEW FRONTIER MEDIA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

The results of operations for the three-month period ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported for prior periods have been reclassified to conform to the
current year's presentation.

The accompanying consolidated financial statements include the accounts of New
Frontier Media, Inc. ("the Company" or "New Frontier Media") and its wholly
owned subsidiaries Colorado Satellite Broadcasting, Inc. d/b/a The Erotic
Networks ("CSB" or "TEN") and Interactive Gallery, Inc. ("IGI").

BUSINESS

New Frontier Media is a publicly traded holding company for its operating
subsidiaries. TEN is a leading provider of adult programming to multi-channel
television providers and low powered direct-to-home C-Band households. Through
its six networks--Pleasure, TeN, ETC, Extasy, True Blue and X-Cubed--TEN is able
to provide a variety of editing styles and programming mixes that appeal to a
broad range of adult customers. IGI is a leading aggregator and reseller of
adult content via the Internet. IGI aggregates adult-recorded video, live-feed
video and still photography from adult content studios and distributes it via
its membership websites and Pay-Per-View feeds. In addition, IGI resells its
aggregated content to third party web masters and resells its Internet traffic
that does not convert into memberships.

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates have been made by management in several areas,
including, but not limited to, the realizability of accounts receivable, 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. Actual results could differ materially from these
estimates.

RECLASSIFICATIONS

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

RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In April 2002, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards 145 Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and amends FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends

8

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

FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
The Company believes that this statement will not have a significant impact on
its results of operations or financial position upon adoption.

In July 2002, The Financial Accounting Standards Board ("FASB") Issued Statement
146 Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is still assessing this new standard but does not
believe that it will have a material effect on its results of operations or
financial condition upon adoption.

NOTE 2 -- EARNINGS (LOSS) PER SHARE

The components of basic and diluted earnings per share are as follows (in 000s):

Approximately 631,000 options and warrants were excluded from the calculation of
diluted earnings per share for the quarter ended June 30, 2002. Inclusion of
these options and warrants, due to the Company reporting a net loss during the
period, would be antidilutive.

NOTE 3 -- SHAREHOLDERS' EQUITY

During the quarter, the Company issued 75,900 shares of common stock upon the
exercise of compensatory options.

NOTE 4 -- STOCK OPTIONS AND WARRANTS

As of June 30, 2002, the Company had granted 280,000 options from the 2001
Incentive Stock Option Plan, 2,969,500 options from the 2000 Millenium Stock
Option Plan, 1,607,950 options from the 1999 Incentive Stock Option Plan and
843,000 options from the 1998 Stock Option Plan.

The Company grants warrants to consultants for services provided allowing them
to purchase common stock of New Frontier Media. During the quarter ended June
30, 2002, 50,000 warrants valued at $72,000 were issued.

9

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

NOTE 5 -- SEGMENT INFORMATION

For internal reporting purposes, the Company has two reportable segments:
1) Subscription/Pay-Per-View TV and 2) Internet Group.

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

10

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

NOTE 6 -- MAJOR CUSTOMER

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

At June 30, 2002 and March 31, 2002, accounts receivable from EchoStar was
approximately $3,414,000 and $2,264,000, respectively. There were no other
customers with receivable balances in excess of 10% of consolidated accounts
receivable. The loss of its significant customer could have a materially adverse
effect on the Company's business, operating results or financial condition.

NOTE 7 -- NOTES PAYABLE

Notes payables consisted of the following:

11

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

NOTE 8 -- RESTRUCTURING EXPENSES

During the fourth quarter of fiscal 2002, the Company recorded restructuring
expenses in connection with its decision to consolidate the Internet Group's
engineering, web production, sales and marketing departments to the Company's
Boulder, Colorado location and the elimination of its customer service
department due to the outsourcing of its credit card processing functions.

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
with respect to the Internet Group's data center facility. The Company intends
to close the Internet Group's in-house data center in Sherman Oaks, California
and outsource the management of its servers, bandwidth and content delivery to a
third party managed service provider. The Company believes that it is more cost
efficient to outsource these functions due to the excess capacity currently
available within these third party facilities. The Internet Group expects to
have its technical infrastructure fully outsourced by the end of the third
quarter of its fiscal year ended March 31, 2003.

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

NOTE 9 -- CLASS A REDEEMABLE PREFERRED STOCK

As of June 30, 2002, the Company authorized a series of shares of 2 million
Class A Redeemable Preferred Stock, par value $2 per share, of which 1.875
million shares are outstanding. The outstanding preferred stock was issued in
May and June of 2002 in exchange for outstanding notes payable owed by the
Company and working capital.

Holders of the Class A Redeemable Preferred Stock are entitled to receive
cumulative cash dividends at a rate of 15.5% per annum per share payable in
quarterly or monthly installments. Such dividends have preference over all other
dividends of stock issued by the Company. The dividends have been reported as
interest expense. Shares are subject to mandatory redemption on or before
January 2, 2004 at a redemption price of face value plus accrued dividends.
Prior to such date and so long as such mandatory redemption obligations have not
been discharged in full, no dividends may be paid or declared upon the Common
Stock, or on any other capital stock ranking junior to or in parity with such
Class A Redeemable Preferred Stock. Under certain circumstances, the Company may
redeem the stock, in whole or in part, prior to the mandatory redemption date.
The Company is not entitled to issue any class of stock that will in effect
reduce the value or security of the Class A Preferred. Each share of preferred
shall have the right to vote together with the holders of the Company's Common
stock on a one vote per share basis (and not as a separate class) on all matters
presented to the holders of the Common Stock.

12

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

The Company recorded the Class A Redeemable Preferred Stock at its redemption
value of $3.75 million. The preferred stock is subject to full or partial early
redemption at the option of the holder if the Company experiences a change in
control as defined as (i) a replacement of more than one-half of the members of
the Company's board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date of the
issuance of the preferred (or by those individuals who are serving as members of
the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date of the issuance of the preferred), (ii) the merger of the
Company with or into another entity that is not wholly owned by the Company,
consolidation or sale of all or substantially all of the assets of the Company
in one or a series of related transactions, or (iii) the execution by the
Company of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth in (i) or (ii).

NOTE 10 -- RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." This statement requires that goodwill,
as well as intangible assets with indefinite lives, acquired after June 30,
2001, not be amortized. Effective in the first quarter of the current year,
goodwill and intangible assets with indefinite lives are no longer being
amortized, but are being tested for impairment using the guidance for measuring
impairment set forth in this statement. As of June 30, 2002, the Company has not
yet determined what the effect of these tests will be on the financial
statements.

The following presents a comparison of net (loss) earnings and (loss) earnings
per share for the three months ended June 30, 2002 to the respective adjusted
amounts for the three months ended June 30, 2001 that would have been reported
had SFAS No. 142 been in effect during the prior year.

The components of other intangible assets are as follows (in 000s):

Amortization expense for intangible assets subject to amortization in each of
the next five fiscal years is estimated to be approximately $691,000 in 2003,
$689,000 in 2004, $556,000 in 2005, $54,000 in 2006, and $2,000 in 2007.

13

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

In August 2001, the FASB issued Statement 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which is effective for fiscal years beginning
after December 15, 2001. Statement 144 establishes a single accounting model for
the impairment or disposal of long-lived assets, including discontinued
operations. Statement 144 supercedes Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
the accounting and reporting provisions of APB 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
Statement 144 also amends ARB 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. This statement has been adopted by the Company and had
no impact on the financial statements.

NOTE 11 -- ASSET IMPAIRMENT CHARGES

During the first quarter of fiscal year 2003, the Company recognized impairment
losses on certain URLs of approximately $535,000 in connection with the Internet
Group. Management identified certain conditions including a declining gross
margin due to the availability of free adult content on the Internet and
decreased traffic to certain of the Company's URLs as indicators of asset
impairment. These conditions led to operating results and forecasted future
results that were substantially less than had been anticipated at the time of
the Company's acquisition of IGI, ITN, and CTI. The Company revised its
projections and determined that the projected results would not fully support
the future amortization of the URLs associated with IGI, ITN, and CTI. In
accordance with the Company's policy, management assessed the recoverability of
the URLs using a cash flow projection based on the remaining amortization period
of four years. Based on this projection, the cumulative cash flow over the
remaining amortization period was insufficient to fully recover the intangible
asset balance.

The Corporation follows the provisions of Statement of Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles. The Corporation reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the sum of the undiscounted expected future
cash flows is less than the carrying amount of the assets, the Corporation
recognizes an impairment loss. Impairment losses are measured as the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
When fair values are not available, the Corporation estimates fair value using
the expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the assets.

NOTE 12 -- LEGAL PROCEEDINGS

On March 20, 2002, Mr. Edward Bonn and Bradley A. Weber attempted to remove Mark
Kreloff as CEO and appoint a special committee headed by Mr. Bonn to operate the
Company while a search was conducted for a new CEO. The Company's Board rejected
Messrs. Bonn's and Weber's proposal and instead, on March 29, 2002, established
the Special Committee to investigate, among other things, the activities of
Messrs. Bonn and Weber relating to their prior management of Interactive
Gallery, Inc. ("IGallery"), the Company's Internet subsidiary, and whether, by
their actions, Messrs. Bonn and Weber triggered the Company's Rights Plan (also
known as a poison pill). On May 28, 2002, following a two-month thorough
investigation by the Special Committee, the Company filed a 13-Count Complaint
in the Superior Court of the State of California for the County of Los Angeles
against: (i) Mr. Bonn and Mr. Weber; (ii) Jerry D. Howard, the former Chief
Financial Officer of IGallery, Interactive Telecom Network, Inc. ("ITN") and
Card Transactions, Inc. ("CTI"); (iii) Response

14

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

Telemedia, Inc. ("RTI"), a California corporation owned by Mr. Bonn; and (iv)
BEF LLC and Beacon Ocean LLC, Messrs. Bonn's and Weber's family trusts,
respectively.

The Complaint's allegations arise, in part, out of the Company's purchase of 100
percent of the issued and outstanding shares of IGallery and ITN and 90 percent
of the issued and outstanding shares of CTI from defendants Bonn, Weber, and
Howard on October 27, 1999. The Complaint alleges that, from early 1999 to the
date of the closing, defendants Bonn, Weber, and Howard knowingly made material
misrepresentations or omissions regarding IGallery's business and business
practices, financial results and prospects, its average customer subscription
rates, the amount of its payments to webmasters, its use of overseas
"aggressive" credit card processors and the significant deficiencies in its
computerized payment-tracking system for the purpose of inducing the Company to
purchase the defendants' stock holdings of IGallery, ITN and CTI.

The Complaint also alleges that, subsequent to the Company's purchase of
IGallery, ITN and CTI on October 27, 1999, Messrs. Bonn, Weber and Howard (as
directors and/or officers) each breached their fiduciary duties owed to the
Company, IGallery, ITN and CTI. Specifically, the Complaint alleges that Messrs.
Bonn, Weber and Howard grossly mismanaged IGallery, ITN and CTI and concealed
marketing, operational and financial information that would have allowed the
Company to detect such mismanagement, including IGallery's difficulty in
attracting new customers at the full membership rate, IGallery's substantial
payments to its top webmasters, which significantly exceeded the revenues
generated by such payments, and IGallery's failure to implement basic management
controls to trace revenue streams or to document the profitability of webmaster
relationships. The Complaint also alleges that Messrs. Bonn, Weber and Howard
engaged in self-dealing transactions that benefited themselves and Mr. Bonn's
company, RTI, at the expense of the Company. In July 2001, when Messrs. Bonn,
Weber and Howard resigned from their positions at IGallery, ITN and CTI, the
Company was able to gain access to the books and records of IGallery, ITN and
CTI and began to uncover the facts underlying the allegations of the Complaint.
The Company had previously been unable to gain access to the books and records
of IGallery, ITN and CTI because, in connection with their acquisition, the
Company had contractually agreed to allow Messrs. Bonn and Weber to manage these
subsidiaries and Messrs. Bonn, Weber and Howard consistently used their
positions as senior management of these subsidiaries to thwart the Company's
efforts to gain access to the subsidiaries' books and records. The impact of
Messrs. Bonn's, Weber's and Howard's alleged behavior was such that, had the
Company been aware of the defendants' alleged misrepresentations and omissions
regarding IGallery, the Company would not have acquired IGallery, ITN and CTI in
October of 1999. In addition, the defendants' actions are alleged to have
resulted in a waste of Company assets because, among other things, millions of
dollars were spent on unprofitable webmaster relationships and Company funds
were diverted to entities controlled by Mr. Bonn which had no relationship to
the Company. Accordingly, the Complaint seeks rescission of the purchase of
IGallery, ITN and CTI as well as monetary damages in an amount to be proven at
trial.

Mr. Bonn, Mr. Weber and Mr. Howard have filed answers denying the allegations
contained in the Complaint and cross-complaints against the Company seeking that
the Company indemnify them against the claims alleged in the Complaint. The
cross-complaints also seek unspecified monetary damages from the Company,
alleging that the Company breached its employment agreements with Messrs. Bonn,
Weber and Howard by terminating their employment on May 28, 2002, and in the
case of Mr. Weber, that the Company wrongfully terminated his stock options. On
June 12, 2002, Messrs. Bonn and Weber filed an Application for a Temporary
Restraining Order and Preliminary Injunction to restrain the Company from
reformatting hard drives of two dozen Pentium I computers which the Company
intended to donate to charity. On June 20, 2002 the Court approved a Stipulation
in which Messrs. Bonn and Weber agreed to vacate the Temporary Restraining Order
and withdrew their Application for a Preliminary Injunction.

15

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

NOTE 13 -- SUBSEQUENT EVENTS

EMPLOYMENT CONTRACT

In August 2002, the Company entered into an employment contract with the
Company's Chief Financial Officer. This employment contract expires in March
2004.

Commitments under this obligation are as follows:

Year Ended March 31,

2003 105,200
2004 157,800

If the Company experiences a change in control (as defined in Note 9), the
executive may terminate her employment, or if the executive is terminated
without cause within six months of the change in control, the executive is
entitled to: (i) all accrued obligations; (ii) all base salary for the duration
of the employment period or for one year, whichever is less; and (iii) the
amount of bonus, if any, paid to the executive for the fiscal year preceding the
change of control.

LEGAL PROCEEDINGS

In August 2002, the Company filed an Amended Reply in New Frontier Media, Inc.,
et al. vs. Edward J. Bonn, et al. (Superior Court of the State of California for
the County of Los Angeles, Case No. BC 274573) disclosing that the Company had
recently discovered additional evidence of alleged fraud committed by Defendants
Edward J. Bonn and Bradley A. Weber based on transfers of IGI's common stock.

16

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

FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. These
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
such statements. The words "believe", "expect", "anticipate", "optimistic",
"intend", "will", and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. The Company
undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to: 1) our ability to
successfully manage our credit card chargeback and credit percentage in order to
maintain our ability to accept credit cards as a form of payment for our
products and services; 2) our ability to compete effectively with our primary
Cable/DBS competitor; 3) our ability to compete effectively with our Internet
competitors; 4) our ability to retain our major customer which accounts for 36%
of our total revenue; and 5) our ability to retain our key executives.

The following table reflects the Company's results of operations for the
quarters ended June 30, 2002 and 2001.

RESULTS OF OPERATIONS

NET REVENUE

Net revenue for the Company was $9.6 million for the quarter ended June 30, 2002
as compared to $14.9 million for the quarter ended June 30, 2001, representing a
decrease of 36%. The decrease in net revenue for the quarter is due to a 67%
decrease in net revenue generated by the Internet Group. Net revenue for the
Internet Group declined from $7.9 million as of the quarter ended June 30, 2001

17

to $2.6 million for the quarter ended June 30, 2002. Revenue from the
Subscription/PPV TV Group was $7.0 million for both quarters ended June 30, 2002
and 2001, respectively. Revenue from the Internet Group declined from 53% of
total net revenue to 27% of total net revenue for the Company.

OPERATING INCOME (LOSS)

Operating income for the Company decreased to a loss of $4.9 million for the
quarter ended June 30, 2002 from operating income of $0.9 million for the
quarter ended June 30, 2001. The decrease in operating income for the Company is
due to a decrease in operating income generated by the Internet Group, a $3.0
million restructuring charge taken during the quarter ended June 30, 2002
related to closing the Internet Group's data center facility, and a $0.5 asset
impairment charge for the writedown of certain Internet Group URLs. The Internet
Group's operating income declined from income of $1.4 million for the quarter
ended June 30, 2001, to an operating loss of $0.5 million for the quarter ended
June 30, 2002.

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

The following table outlines the current distribution environment and
addressable households for each network:

(1) % change gives effect to a 30% decline in the C-band market's total
addressable households. Total addressable C-Band households declined from
1.0 million as of June 30, 2001 to 700,000 as of June 30, 2002.

(2) This network was formerly known as GonzoX. The network was renamed X-Cubed
in May 2001.

NET REVENUE

Total net revenue for the Subscription/PPV TV Group was $7.0 million for both
quarters ended June 30, 2002 and 2001. Of total net revenue, C-Band net revenue
was $2.0 million for the quarter ended June 30, 2002 as compared to $2.5 million
for the quarter ended June 30, 2001, representing a decrease of 20%. Revenue
from the Group's Cable/DBS services for the quarter ended June 30, 2002 was $5.0
million as compared to $4.5 million for the quarter ended June 30, 2001, an
increase of 11%. Revenue from the Group's Cable/DBS services is responsible for
71% of the Group's total net revenue for the quarter ended June 30, 2002, as
compared to 64% for the quarter ended June 30, 2001.

The decrease in C-Band revenue for the quarter ended June 30, 2002 is due to the
continued decline of the C-Band market as consumers convert from C-Band "big
dish" analog satellite systems to smaller, 18-inch digital DBS satellite
systems. The C-Band market has decreased 30% since June 30, 2001, from 1.0
million addressable subscribers to 0.7 million addressable subscribers as of
June 30, 2002. In addition, the Subscription/PPV TV Group terminated its third
party C-Band distributor contracts during the past year because the contracts
were no longer favorable to the Group. Much of the decline in the C-Band revenue
is attributable to these contract terminations.

18

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 revenue from
the Extasy network, 2) a decrease in revenue from the Pleasure network which was
offset entirely by an increase in revenue from the Group's Video-on-Demand
("VOD") services, 3) a decrease in revenue from the TeN network, and 4) the
addition of a new revenue stream from product advertising on the Group's
networks.

As of June 30, 2002, Extasy was available to 7.5 million Cable/DBS addressable
subscribers up from 2.9 million addressable subscribers as of June 30, 2001, an
increase of 159%. The majority of this increase is due to EchoStar Communication
Corporation's DISH network ("DISH") moving the Extasy network from its satellite
at 110 degrees, where it has resided since its launch on DISH, to its satellite
at 119 degrees. DISH's satellite at 119 degrees is viewed by nearly double the
number of addressable subscribers than its satellite at 110 degrees. This change
in satellite location, coupled with an increase in the retail price for PPV and
subscription transactions that was implemented by DISH in September 2001,
increased revenue from the Extasy network by 46% quarter over quarter.

Pleasure was available to 8.0 million addressable subscribers as of June 30,
2002, representing a 56% decline from 18.2 million subscribers as of June 30,
2001. This decrease in addressable subscribers is a result of disaffiliations by
DISH and Hughes Electronic Corporation's DirecTV ("DirecTV") that occurred
during the prior fiscal year when both companies decided to increase the number
of partially edited services on their platforms and decrease the number of "most
edited"services. The decrease in revenue from the Pleasure network was offset by
an increase in revenue from the Subscription/PPV TV Group's VOD services which
are provided to cable operators in both its Pleasure and TeN editing formats.
The Group is currently the exclusive provider of adult content for Time Warner
Cable's ("Time Warner") VOD service and has added new VOD distribution with
Charter Communication, Inc. ("Charter") during the quarter ended June 30, 2002.
As of June 30, 2002, the Group's VOD service was available to 1.6 million Time
Warner and Charter addressable households, up from 0.3 million as of June 30,
2001.

Revenue from the Group's TeN network has declined due to a 37% year over year
decrease in the number of monthly and annual DISH subscribers. This decline in
subscribers has been ongoing since DISH converted TeN to a PPV service in 1999.
In addition, PPV buys for TeN on the DISH platform have declined 34% year over
year due to the addition of a competing network of the same editing standard
that was added to the DISH platform in September 2001.

The Subscription/PPV TV Group added a new revenue stream during the fourth
quarter of its fiscal year ended March 31, 2002, related to the advertising of
adult lifestyle products on its networks and the selling of traditional
"spot"advertising. The Group partners with third parties for the sale and
fulfillment of these adult lifestyle products. The Group's in-house promotions
department creates the interstitial content advertising the product and shares
in any revenue generated by the advertisement of the product on its networks.
This revenue stream now accounts for 7% of the Subscription/PPV TV Group's total
Cable/DBS revenue.

COST OF SALES

Cost of sales for the Subscription/PPV TV Group was $3.4 million, or 49% of
revenue, for the quarter ended June 30, 2002, as compared to $3.2 million, or
46% of revenue, for the quarter ended June 30, 2001, an increase of 6%.

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

The increase in cost of sales year over year is due to: a) an increase in the
amortization of the Group's content licenses and b) an increase in costs
associated with the digital broadcast center as the Group has added additional
functionalities and redundancies. These increases were offset by declines in the
Group's transponder and call center operation costs.

19

OPERATING INCOME

Operating income for the Subscription/PPV TV Group for the quarter ended June
30, 2002 was $1.6 million as compared to operating income of $1.3 million for
the quarter ended June 30, 2001, an increase of 23%.

The increase in operating income for the quarter ended June 30, 2002 as compared
to the quarter ended June 30, 2001 is due to a 20% decline in operating expenses
year over year. Operating expenses as a percentage of revenue declined from 36%
of revenue as of the quarter ended June 30, 2001 to 29% of revenue for the
quarter ended June 30, 2002.

The decrease in operating expenses is due to a decline in advertising and trade
show costs as compared to a year ago, as well as to a decrease in bad debt
expense related to the C-Band distributor contracts. In addition, due to an
accounting pronouncement change, goodwill and intangible assets with indefinite
lives are no longer required to be amortized and are, instead, tested for
impairment on an annual basis using the guidance for measuring impairment as set
forth in SFAS 142, "Goodwill and Other Intangible Assets". Goodwill amortization
was $159,000 for the quarter ended June 30, 2001.

INTERNET GROUP
NET REVENUE

Total net revenue for the Internet Group was $2.6 million for the quarter ended
June 30, 2002, as compared to $7.9 million for the quarter ended June 30, 2001,
representing a decrease of 67%. The Internet Group's revenue is comprised of
membership revenue from its consumer-based web sites, revenue from the sale of
its content feeds, and revenue from the sale of exit traffic.

Net membership revenue for the Internet Group was $1.7 million for the quarter
ended June 30, 2002, as compared to net membership revenue of $5.3 million for
the quarter ended June 30, 2001, which represents a decrease of 68%. The
Internet Group's chargebacks and credits were $69,000, or 4% of gross membership
revenue for the quarter ended June 30, 2002, as compared to $0.7 million, or 13%
of gross membership revenue for the quarter ended June 30, 2001. The Internet
Group has seen a decline in its chargebacks and credits as a percentage of gross
membership revenue due to the outsourcing of its credit card processing to a
third party whose fraud screening is more rigorous than the Internet Group's own
internal fraud controls.

The Internet Group has seen a decline in its membership revenue as a result of a
decrease in traffic to its sites. This decrease in traffic to the Internet
Group's sites during the quarter ended June 30, 2002 is primarily due to changes
made to the Internet Group's traffic acquisition model. The Internet Group
changed its traffic acquisition model during the quarter ended June 30, 2001 to
compensate an affiliated webmaster for traffic directed to the Internet Group's
web sites only upon the conversion of a referral into a paying member. Prior to
this change, the Group was paying for traffic based upon the amount of traffic
directed to the Group's web sites, regardless of whether this traffic resulted
in a paying member. This change in the Group's traffic acquisition model has
resulted in an 89% decline in webmaster payouts for the quarter ended June 30,
2002, while net membership revenue declined 68% during the same period. The
Internet Group has no plans to increase its traffic acquisition costs in future
periods in order to attract traffic to its web sites. Instead, marketing efforts
will focus on cross selling the Internet Group's flagship website, www.ten.com,
on the Subscription/PPV TV Group's networks, search engine optimization
techniques, and revenue sharing agreements with portals and third party
gatekeepers in order to gain direct access to consumers in search of adult
entertainment. This effort to create partnerships with portals and third party
gatekeepers is essentially a duplication of the Subscription/PPV TV Group's
model for the Internet.

The decline in membership revenue is also attributable to the Internet Group
decreasing the retail price of its flagship web site, www.ten.com, from $29.95
to $14.74 during the quarter ended December 31, 2001. This price change was
predicated upon the belief that the Internet Group's web sites must be more
competitive with other forms of electronic entertainment, such as pay-per-view
movies or

20

monthly subscriptions to HBO or Showtime. The Internet Group has also decreased
the number of consumer web sites that it markets from 30 to 10. The decrease in
the number of web sites being marketed allows the Internet Group to ensure that
the web sites are always updated with new content on a daily/weekly basis while
increasing the depth, breadth and relevance of the content included in each web
site. Both of these changes (pricing and content relevance) reflect the Internet
Group's commitment to improving the consumer experience within its sites and
increasing member retention.

Revenue from the Internet Group's sale of content was $0.4 million for the
quarter ended June 30, 2002, as compared to $0.6 million for the quarter ended
June 30, 2001, representing a decrease of 33%. This decrease in revenue from the
sale of content was due to a softening in the demand for its content by
third-party webmasters. The Internet Group has begun to focus more effort on
this revenue stream by hiring a new sales team, establishing a fixed matrix of
retail pricing for its products, creating new content products to market, and by
establishing a billing and collections process that ensures pre-payment for
products.

Revenue is earned from traffic sales by forwarding exit traffic and traffic from
selected vanity domains to affiliate webmaster marketing programs, monetizing
foreign traffic via international dialer companies, marketing affiliated
webmaster sites through the Internet Group's double opt-in email list, and by
directing traffic to its pay-per-click ("PPC") search engine, www.sexfiles.com.
Revenue from sale of traffic was $0.5 million for the quarter ended June 30,
2002, as compared to $1.9 million for the quarter ended June 30, 2001, which
represents a decrease of 74%. The Internet Group's revenue from sale of traffic
has decreased year over year because of a decline in overall traffic purchased
by the Internet Group under its new traffic acquisition model. The decline in
traffic to the Internet Group's web sites results in less traffic available to
sell both domestically and internationally. Revenue from the international sale
of traffic was 43% and 47% of total sale of traffic revenue for the quarters
ended June 30, 2002 and 2001, respectively.

The Internet Group has changed its methodology for monetizing the exit traffic
from its sites (i.e., traffic that comes through its web sites and does not
convert into a paying member) since the quarter ended June 30, 2001. Instead of
selling its traffic to affiliated webmasters it now directs these exiting
consumers to its own PPC search engine. The PPC search engine allows the
Internet Group to monetize its exit traffic by auctioning off keyword searches
to advertisers that prepay for placement within the search engine. This results
in a pure market model for the advertiser. The more the advertiser bids for the
keyword, the higher their site is shown in the list of search results returned
to the consumer. The result for the advertiser is qualified traffic that is more
likely to convert into a paying member, while the consumer gets immediate access
to relevant results. The Internet Group began beta testing its PPC engine during
the quarter ended June 30, 2002.

In addition to revenue from its PPC search engine, the Internet Group expects
that its sale of traffic revenue will include revenue from the marketing of its
double opt-in email program for the fiscal year ended March 31, 2003. The
Internet Group has hired a sales team that is dedicated to this revenue stream.
Revenue is earned by selling email campaigns to customers that are marketed to
the Group's 3.2 million opt-in email users. Email campaigns can be sold on a
cost-per-click or cost-per-acquisition basis with customers purchasing a
dedicated emailer where only their sites are included or a composite emailer
where their sites are included with others. Currently, the Internet Group relies
on a third party to manage its email campaigns. The Internet Group is working
towards bringing this process in-house during the current fiscal year in order
to decrease the cost associated with this revenue stream and increase its profit
margin.

COST OF SALES

Cost of sales for the Internet Group was $1.8 million for the quarter ended June
30, 2002, as compared to $4.0 million for the quarter ended June 30, 2001,
representing a decrease of 55%. 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.

21

Cost of sales was 69% and 51% of total net revenue for the quarters ended June
30, 2002 and 2001, respectively.

More than 70% of the traffic to the Internet Group's web sites used to be
acquired through affiliate programs marketed to webmasters. These programs
compensated webmasters for traffic referrals to the Internet Group's web sites.
A webmaster would be paid a fee of $25 - $45 per referral that resulted in a
monthly membership to one of the Internet Group's web sites. The Internet Group
no longer actively markets any traffic acquisition programs. The Internet
Group's traffic acquisition costs also include payments made to affiliated
webmasters for the acquisition of email addresses as part of its opt-in email
program. The Internet Group discontinued paying for the acquisition of email
addresses during the quarter ended June 30, 2002.

As a result of these changes, the Internet Group's traffic acquisition costs
were $0.2 million, or 8% of net revenue, as of the quarter ended June 30, 2002,
as compared to $1.9 million, or 24% of net revenue, for the quarter ended June
30, 2001, representing a decrease of 89%.

Merchant banking fees, including fees for credits and chargebacks, were 17% of
net membership revenue for the quarter ended June 30, 2002 as compared to 13%
for the quarter ended June 30, 2001. The increase in merchant banking fees as a
percentage of net membership revenue is due to the outsourcing of the Internet
Group's credit card processing and customer service functions. This increase in
merchant banking fees as a percentage of net membership revenue is offset by the
decrease in payroll associated with the termination of its in-house customer
service function.

Operational expenses, which include depreciation and amortization of Internet
equipment, were $0.9 million and $0.8 million for the quarters ended June 30,
2002 and 2001, respectively. Most of these costs are non-cash and relate to the
operation of the Internet Group's data center facility. During the quarter ended
June 30, 2002, the Company decided to close the Internet Group's data center and
outsource the management of its servers and bandwidth to a co-location facility
(see "Restructuring Expenses").

OPERATING INCOME (LOSS)

Operating income (loss) for the Internet Group was a loss of $0.5 million for
the quarter ended June 30, 2002 as compared to operating income of $1.4 million
for the quarter ended June 30, 2001, representing a decrease of 136%. Operating
expenses were 50% and 32% of net revenue for the quarters ended June 30, 2002
and 2001, respectively. Total operating expenses decreased 48% from the quarter
ended June 30, 2001.

The decrease in operating expenses for the quarter ended June 30, 2002 is due to
a decrease in payroll, benefit, and facility costs in the amount of $0.8 million
as a result of the restructuring of the customer service, marketing, sales and
engineering operations concluded during the fourth quarter of the fiscal year
ended March 31, 2002, a decrease in trade show and advertising costs, and a
decrease in legal costs year over year.

As part of its lawsuit filed against Edward Bonn, Bradley Weber, Jerry Howard,
and Response Telemedia, Inc. (see "Legal Proceedings") the Company is seeking
rescission of the acquisition of the Internet Group and the return of the 6
million shares of the Company's common stock issued as consideration in the
acquisition. Should the Company be successful in the rescission of this deal, it
does not expect that the rescission would have a material effect on its results
from operations since the Internet Group's revenue is currently generated from
products created since the acquisition, including the flagship web site
www.ten.com, the PPC engine, and the opt-in email marketing program.

RESTRUCTURING EXPENSES

During the quarter ended June 30, 2002, the Company adopted a restructuring plan
with respect to the Internet Group's data center facility. The Company intends
to close the Internet Group's in-house data center in Sherman Oaks, California
and outsource the management of its servers, bandwidth and

22

content delivery to a third party managed service provider. The Company believes
that it is more cost efficient to outsource these functions due to the excess
capacity currently available within these third party facilities. The Internet
Group expects to have its technical infrastructure fully outsourced by the end
of the third quarter of its fiscal year ended March 31, 2003.

As a result of these measures the Company expects to save approximately $1.8
million on an annualized basis that will be reflected in its cost of sales.
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 first quarter of fiscal year 2003, the Company recognized impairment
losses on certain URLs of approximately $535,000 in connection with the Internet
Division. Management identified certain conditions including a declining gross
margin due to the availability of free adult content on the Internet and
decreased traffic to the Company's URLs as indicators of asset impairment. These
conditions led to operating results and forecasted future results that were
substantially less than had been anticipated at the time of the Company's
acquisition of IGI, ITN, and CTI. The Company revised its projections and
determined that the projected results would not fully support the future
amortization of the URLs associated with IGI, ITN, and CTI. In accordance with
the Company's policy, management assessed the recoverability of the URLs using a
cash flow projection based on the remaining amortization period of four years.
Based on this projection, the cumulative cash flow over the remaining
amortization period was insufficient to fully recover the intangible asset
balance.

CORPORATE ADMINISTRATION

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

Corporate administration expenses were $2.5 million and $1.8 million for the
quarters ended June 30, 2002 and 2001, respectively, representing an increase of
39% year over year. The increase in corporate administration expenses for the
quarter ended June 30, 2002 is due to the following items: a) an increase in
legal fees related to the Company's proxy fight and its lawsuit filed against
Edward Bonn, Bradley Weber, Jerry Howard, and Response Telemedia, Inc. (see
Legal Proceedings); b) a $0.2 million non-cash consulting expense incurred for
warrants to purchase Company stock which were granted to outside consultants; c)
an increase in accounting fees related to the proxy fight and the Company's
lawsuit referenced in item (a); and d) an increase in insurance and facility
expenses.

OTHER EXPENSE

Other expense increased from $0.5 million as of June 30, 2001 to $0.7 million as
of June 30, 2002, representing an increase of 40%. This increase is due to an
$117,500 write down in value of the Company's investment in Metro Global Media,
Inc. ("Metro") stock and the write-off of $187,000 in non-cash debt offering
costs related to the early repayment of the Company's debt obligations during
the current year quarter.

In July 1999, the Company entered into an agreement with Metro in which it
received 250,000 shares of Metro common stock. The market value of this stock on
the date of the transaction was $2.47 per share. Subsequent to this agreement
the stock was delisted from the NASDAQ. During the quarter ended September 30,
2000, the Company wrote the Metro stock down to a value of $117,500. At that
time, Metro was still thinly traded on NASDAQ's over-the-counter market at $0.47
per share. During

23

the quarter ended June 30, 2002, the Metro stock ceased trading and the Company
wrote off the remaining value of $117,500.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended June 30, 2002, cash used in operating activities was $1.0
million and was primarily associated with a net loss of $5.6 million, an
increase in accounts receivable of $1.0 million related to the Subscription/PPV
TV Group and a $1.3 million increase in prepaid distribution rights related to
the Company's licensing of content. This use of cash was offset by a $2.7
million restructuring and impairment charge taken during the quarter ended June
30, 2002 related to closing the Internet Group's data center facility, $2.1
million in depreciation and amortization, $0.5 million related to non-cash
expenses from warrants issued to consultants for services and issued as offering
costs related to debt obligations repaid during the quarter, and a $0.9 million
increase in accrued liabilities.

For the quarter ended June 30, 2001, cash provided by operating activities of
$2.3 million was primarily associated with net income of $0.2 million,
depreciation and amortization expense of $2.2 million, an increase in accounts
payable of $0.8 million, and a decrease in accounts receivable of $0.6 million.
This cash provided by operations was offset by a $1.1 million increase in
prepaid distribution rights related to the licensing of content, a $0.7 million
decrease in accrued expenses, and a $0.7 million increase in other assets.

Cash used in investing activities was $0.2 million for the quarter ended June
30, 2002 compared to cash used in investing activities of $1.2 million for the
quarter ended June 30, 2001. 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 investing activities for the quarter ended June 30, 2001
was primarily related to $0.5 million paid for the acquisition of the subscriber
base of Emerald Media, Inc. by the Subscription/PPV TV Group and $0.7 million
related to the build out of office space for the Internet Group, the data center
facility and the Boulder, Colorado headquarters.

Cash provided by financing activities was $0.2 million for the quarter ended
June 30, 2002, compared to cash used in financing activities of $2.5 million for
the quarter ended June 30, 2001. 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 preferred stock pays dividends at 15.5% on a monthly and quarterly basis and
is redeemable anytime at the Company's option until January 2004, by which time
it must be redeemed. Cash provided by financing activities was offset by $0.4
million in payments made during the quarter on the Company's capital lease
obligations.

Cash used in financing activities of $2.5 million for the quarter ended June 20,
2001 was related to the repayment of $2.0 million in principal on the Company's
outstanding debt obligations and $0.5 million in payments made on the Company's
capital lease obligations.

The Company expects to fund the dividends due on the preferred stock from its
cash flows from operations. The Company anticipates funding the redemption of
the preferred stock in 2004 from its cash flows from operations or a refinancing
of the obligation prior to the redemption. In the event the preferred stock
should become due by reason of a change in control occurring at the Company's
Annual Meeting of its Shareholders on August 20, 2002, the Company's liquidity
and capital resources is likely to be materially and adversely impaired.

If New Frontier Media were to lose its major customer that accounts for 36% of
its revenue, its ability to finance its operating requirements would be severely
impaired.

24

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, 2002, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair value of these assets. Furthermore, the Company's borrowings
are at fixed interest rates, limiting the Company's exposure to interest rate
risk.

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

PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

On March 20, 2002, Mr. Edward Bonn and Bradley A. Weber attempted to remove Mark
Kreloff as CEO and appoint a special committee headed by Mr. Bonn to operate the
Company while a search was conducted for a new CEO. The Company's Board rejected
Messrs. Bonn's and Weber's proposal and instead, on March 29, 2002, established
the Special Committee to investigate, among other things, the activities of
Messrs. Bonn and Weber relating to their prior management of Interactive
Gallery, Inc. ("IGallery"), the Company's Internet subsidiary, and whether, by
their actions, Messrs. Bonn and Weber triggered the Company's Rights Plan (also
known as a poison pill).

On May 28, 2002, following a two-month thorough investigation by the Special
Committee, the Company filed a 13-Count Complaint in the Superior Court of the
State of California for the County of Los Angeles against: (i) Mr. Bonn and Mr.
Weber; (ii) Jerry D. Howard, the former Chief Financial Officer of IGallery,
Interactive Telecom Network, Inc. ("ITN") and Card Transactions, Inc. ("CTI");
(iii) Response Telemedia, Inc. ("RTI"), a California corporation owned by Mr.
Bonn; and (iv) BEF LLC and Beacon Ocean LLC, Messrs. Bonn's and Weber's family
trusts, respectively.

The Complaint's allegations arise, in part, out of the Company's purchase of 100
percent of the issued and outstanding shares of IGallery and ITN and 90 percent
of the issued and outstanding shares of CTI from defendants Bonn, Weber, and
Howard on October 27, 1999. The Complaint alleges that, from early 1999 to the
date of the closing, defendants Bonn, Weber, and Howard knowingly made material
misrepresentations or omissions regarding IGallery's business and business
practices, financial results and prospects, its average customer subscription
rates, the amount of its payments to webmasters, its use of overseas
"aggressive" credit card processors and the significant deficiencies in its
computerized payment-tracking system for the purpose of inducing the Company to
purchase the defendants' stock holdings of IGallery, ITN and CTI.

The Complaint also alleges that, subsequent to the Company's purchase of
IGallery, ITN and CTI on October 27, 1999, Messrs. Bonn, Weber and Howard (as
directors and/or officers) each breached their fiduciary duties owed to the
Company, IGallery, ITN and CTI. Specifically, the Complaint alleges that Messrs.
Bonn, Weber and Howard grossly mismanaged IGallery, ITN and CTI and concealed
marketing, operational and financial information that would have allowed the
Company to detect such mismanagement, including IGallery's difficulty in
attracting new customers at the full membership rate, IGallery's substantial
payments to its top webmasters, which significantly exceeded the revenues
generated by such payments, and IGallery's failure to implement basic management
controls to trace revenue streams or to document the profitability of webmaster
relationships. The Complaint also alleges that Messrs. Bonn, Weber and Howard
engaged in self-dealing transactions that benefited themselves and Mr. Bonn's
company, RTI, at the expense of the Company. In July 2001, when Messrs.

25

Bonn, Weber and Howard resigned from their positions at IGallery, ITN and CTI,
the Company was able to gain access to the books and records of IGallery, ITN
and CTI and began to uncover the facts underlying the allegations of the
Complaint. The Company had previously been unable to gain access to the books
and records of IGallery, ITN and CTI because, in connection with their
acquisition, the Company had contractually agreed to allow Messrs. Bonn and
Weber to manage these subsidiaries and Messrs. Bonn, Weber and Howard
consistently used their positions as senior management of these subsidiaries to
thwart the Company's efforts to gain access to the subsidiaries' books and
records.

The impact of Messrs. Bonn's, Weber's and Howard's alleged behavior was such
that, had the Company been aware of the defendants' alleged misrepresentations
and omissions regarding IGallery, the Company would not have acquired IGallery,
ITN and CTI in October of 1999. In addition, the defendants' actions are alleged
to have resulted in a waste of Company assets because, among other things,
millions of dollars were spent on unprofitable webmaster relationships and
Company funds were diverted to entities controlled by Mr. Bonn which had no
relationship to the Company. Accordingly, the Complaint seeks rescission of the
purchase of IGallery, ITN and CTI as well as monetary damages in an amount to be
proven at trial.

Mr. Bonn, Mr. Weber and Mr. Howard have filed answers denying the allegations
contained in the Complaint and cross-complaints against the Company seeking that
the Company indemnify them against the claims alleged in the Complaint. The
cross-complaints also seek unspecified monetary damages from the Company,
alleging that the Company breached its employment agreements with Messrs. Bonn,
Weber and Howard by terminating their employment on May 28, 2002, and in the
case of Mr. Weber, that the Company wrongfully terminated his stock options.

On June 12, 2002, Messrs. Bonn and Weber filed an Application for a Temporary
Restraining Order and Preliminary Injunction to restrain the Company from
reformatting hard drives of two dozen Pentium I computers which the Company
intended to donate to charity.

On June 20, 2002 the Court approved a Stipulation in which Messrs. Bonn and
Weber agreed to vacate the Temporary Restraining Order and withdrew their
Application for a Preliminary Injunction.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

10.1 Agreement between Colorado Satellite Broadcasting, Inc. and Loral
Skynet Concerning Skynet Transponder Service

10.2 Agreement between Colorado Satellite Broadcasting, Inc. and Loral
Skynet Concerning Skynet Space Segment Service

10.3 Amendment No. 1 to Agreement between Colorado Satellite Broadcasting,
Inc. and Loral Skynet Concerning Skynet Space Segment Service

10.4 Teleport Services Agreement between Colorado Satellite Broadcasting,
Inc. and Williams Vyvx Services

10.5 Amendment No. 1 to Teleport Services Agreement between Colorado
Satellite Broadcasting, Inc. and Williams Vyvx Services

10.6 Amendment No. 2 to Teleport Services Agreement between Colorado
Satellite Broadcasting, Inc. and Williams Vyvx Services

10.7 Amendment No. 3 to Teleport Services Agreement between Colorado
Satellite Broadcasting, Inc. and Williams Vyvx Services

10.8 Employment Agreement between New Frontier Media, Inc. and Karyn L.
Miller

10.9 License Agreement between Colorado Satellite Broadcasting, Inc. and
Metro Global Media, Inc.

26

99.1 Certification by Mark Kreloff pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act Act of 2002

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

b) Reports on Form 8-K

On April 4, 2002, the Company filed a Form 8-K reporting that Edward Bonn, a
former director of the Company, had made a public announcement of his intention
to call a special meeting of the Company's shareholders. The stated purpose of
the meeting was to replace the Board of Directors and to rescind the Company's
Rights Plan, also known as a poison pill, which was adopted in November 2001.

On June 10, 2002, the Company filed a Form 8-K reporting the resignation of
Bradley Weber from its Board of Directors.

27

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 14, 2002

28