| NEW FRONTIER MEDIA INC Item 1A Risk Factors 19 ITEM 1A RISK FACTORS THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THEIR USE OF THE FORWARD-LOOKING WORDS “ANTICIPATE,” “ESTIMATE,” “PROJECT,” “LIKELY,” “BELIEVE,” “INTEND,” “EXPECT,” OR SIMILAR WORDS THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS, CONTAIN PROJECTIONS REGARDING FUTURE DEVELOPMENTS, OPERATIONS, OR FINANCIAL CONDITIONS, OR STATE OTHER FORWARD-LOOKING INFORMATION WHEN CONSIDERING THE FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT, YOU SHOULD CONSIDER THE RISKS SET FORTH BELOW AND OTHER CAUTIONARY STATEMENTS THROUGHOUT THIS REPORT YOU SHOULD ALSO KEEP IN MIND THAT ALL FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT’S EXISTING BELIEFS ABOUT PRESENT AND FUTURE EVENTS OUTSIDE OF MANAGEMENT’S CONTROL AND ON ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT IF ONE OR MORE RISKS IDENTIFIED IN THIS REPORT OR OTHER FILING MATERIALIZES, OR ANY OTHER UNDERLYING ASSUMPTIONS PROVE INCORRECT, OUR ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, PROJECTED, OR INTENDED The loss of any of our current major customers, Dish Network, Time Warner Cable, and Comcast Corporation, would have a material adverse affect on our operating performance and financial condition |
| DISH Network, one of the leading providers of direct broadcast satellite services in the United States, Time Warner Cable and Comcast Corporation, are major customers of our Pay TV Group |
| The loss of any of DISH Network, Time Warner Cable, and Comcast Corporation as customers would have a material adverse effect on our business operations and financial condition |
| We are currently negotiating a contract with DISH Network |
| As a result of these negotiations, we expect that our license fees will be reduced and that, as a result, our revenue will be negatively impacted |
| For our fiscal year ended March 31, 2006, our revenues from DISH Network, Time Warner Cable, and Comcast Corporation were approximately 35prca, 14prca, and 12prca, respectively, of our total Company-wide revenues |
| DISH Network is not contractually required to carry our programming and can cancel its broadcast of our programming at any time |
| 19 _________________________________________________________________ Failure to maintain our agreements with Cable MSOs on favorable terms could adversely affect our business, financial condition, or results of operations |
| We currently have agreements with the nation’s five largest Cable MSOs |
| Our agreements with these operators may be terminated on short notice without penalty |
| If one or more Cable MSOs terminates or does not renew our agreements, or does not renew the agreement on terms as favorable as those of our current agreements, our business, financial condition, or results of operations could be materially adversely affected |
| Failure to meet our performance guarantee with Direct TV could adversely affect our business, financial condition, or results of operations |
| We recently entered into a two-year agreement with Direct TV for the distribution of two of our networks |
| This agreement requires us to meet certain performance targets connected with our replacement of competitive services |
| If we are unsuccessful in meeting these performance targets, our business, financial condition, or results of operations could be materially adversely affected |
| Limits to our access to distribution channels could cause us to lose subscriber revenues and adversely affect our operating performance |
| Our satellite uplink provider’s services are critical to us |
| If our satellite uplink provider fails to provide the contracted uplinking services, our satellite programming operations would in all likelihood be suspended, resulting in a loss of substantial revenue to the Company |
| If our satellite uplink provider improperly manages its uplink facilities, we could experience signal disruptions and other quality problems that, if not immediately addressed, could cause us to lose subscribers and subscriber revenues |
| Our continued access to satellite transponders is critical to us |
| Our satellite programming operations require continued access to satellite transponders to transmit programming to our subscribers |
| We also use satellite transponders to transmit programming to cable operators and DBS providers |
| Material limitations to satellite transponder capacity could materially adversely affect our operating performance |
| Access to transponders may be restricted or denied if: • we or the satellite owner is indicted or otherwise charged as a defendant in a criminal proceeding; • the FCC issues an order initiating a proceeding to revoke the satellite owner’s authorization to operate the satellite; • the satellite owner is ordered by a court or governmental authority to deny us access to the transponder; • we are deemed by a governmental authority to have violated any obscenity law; or • our satellite transponder provider determines that the content of our programming is harmful to its name or business |
| In addition to the above, the access of our networks to transponders may be restricted or denied if a governmental authority commences an investigation concerning the content of the transmissions |
| The primary way for us to expand our subscriber base is to convince additional Cable operators and DBS providers to carry our programming |
| We can give no assurance, however, that our efforts to increase our base of subscribers will be successful |
| If we are unable to compete effectively with our primary Cable/DBS competitor, who has significantly greater resources than us, we will not be able to increase subscriber revenues |
| Our ability to increase subscriber revenues and operate profitably is directly related to our ability to compete effectively with Playboy, our principal competitor |
| Playboy has significantly greater financial, sales, marketing and other resources to devote to the development, promotion and sale of its cable programming products, as well as a longer operating history and broader name recognition, than we do |
| We compete with Playboy as to the editing standards of its programming, network 20 _________________________________________________________________ performance in terms of subscriber buy rates, and the license fees that we offer to Cable operators and DBS providers |
| If we are unable to compete effectively with other forms of adult and non-adult entertainment, we will also not be able to increase subscriber revenue |
| Our ability to increase revenue is also related to our ability to compete effectively with other forms of adult and non-adult entertainment |
| We face competition in the adult entertainment industry from other providers of adult programming, adult video rentals and sales, books and magazines aimed at adult consumers, adult oriented telephone chat lines, adult oriented Internet services, and adult oriented wireless services |
| To a lesser extent, we also face general competition from other forms of non-adult entertainment, including sporting and cultural events, other premium pay services, other television networks, feature films and other programming |
| Our ability to compete depends on many factors, some of which are outside of our control |
| These factors include the quality and appeal of our competitors’ content, the strength of our competitors’ brands, the technology utilized by our competitors, the effectiveness of their sales and marketing efforts and the attractiveness of their product offerings |
| Our existing competitors, as well as potential new competitors, may have significantly greater financial, technical and marketing resources, as well as better name recognition than we do |
| This may allow them to devote greater resources than we can to the development and promotion of their product offerings |
| These competitors may also engage in more extensive technology research and development, and adopt more aggressive pricing policies for their content |
| Additionally, increased competition could result in price reductions, lower margins and negatively impact our financial results |
| The continued addition of new competitors to the Video-On-Demand distribution platform will likely have a material adverse affect on our operating performance |
| Revenue from our Pay TV Group’s Video-on-Demand service became a significant part of our overall revenue mix during our fiscal year ended March 31, 2005 |
| The continued addition of new competitors to the VOD platform, either on platforms where we have previously enjoyed exclusivity or where we currently share the platform, may continue to have an adverse affect on our operating performance |
| We face competition on the VOD platform from established adult video producers with postproduction capabilities, as well as independent companies that distribute adult entertainment |
| These competitors may include producers such as Hustler, Penthouse, Wicked Pictures, and Playgirl |
| In the event that cable companies seek to purchase adult video content for their VOD service directly from adult video producers or other independent distributors of such content our VOD business is likely to suffer |
| We may be liable for the content we make available on the internet |
| Because of the adult-oriented content of our web site, we may be subject to obscenity or other legal claims by third parties |
| We may also be subject to claims based upon the content that is available on our web site through links to other sites |
| Our business, financial condition and operating results could be harmed if we were found liable for this content |
| Implementing measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness of our web site and/or its availability in various geographic areas, which would negatively impact our ability to generate revenue |
| Furthermore, our insurance may not adequately protect us against all of these types of claims |
| 21 _________________________________________________________________ Increased government regulation in the United States and abroad could impede our ability to deliver our content and expand our business |
| New laws or regulations, or the new application of existing laws could prevent us from making our content available in various jurisdictions or otherwise have a material adverse effect on our business, financial condition and operating results |
| These new laws or regulations may relate to liability for information retrieved from or transmitted over the Internet, taxation, user privacy and other matters relating to our products and services |
| Moreover, the application to the Internet of existing laws governing issues such as intellectual property ownership and infringement, pornography, obscenity, libel, employment and personal privacy is still developing |
| Cable system and DBS operators could become subject to new governmental regulations that could further restrict their ability to broadcast our programming |
| If new regulations make it more difficult for Cable and DBS operators to broadcast our programming, our operating performance would be adversely affected |
| The current administration in Washington DC could result in increased government regulation of our business |
| It is not possible for us to predict what new governmental regulations we may be subject to in the future |
| Continued imposition of tighter processing restrictions by the various credit card associations and acquiring banks would make it more difficult to generate revenues from our website |
| Unlike a merchant handling a sales transaction in a card present environment, the e-commerce merchant is 100prca responsible for all fraud perpetrated against them |
| Our ability to accept credit cards as a form of payment for our products and services has been or could further be restricted or denied for a number of reasons, including but not limited to: • if we experience excessive chargebacks and/or credits; • if we experience excessive fraud ratios; • if there is a change in policy of the acquiring banks and/or card associations with respect to the processing of credit card charges for adult-related content; • continued tightening of credit card association chargeback regulations in international areas of commerce; • association requirements for new technologies that consumers are less likely to use; • an increasing number of European and US banks will not take accounts with adult-related content In this regard we note that American Express has a policy of not processing credit card charges for online adult-related content |
| To the extent other credit card processing companies were to implement a similar policy it could have a material adverse effect on our business operations and financial condition |
| The Internet Group utilizes one company to process credit cards for its membership website |
| If this credit card company were to experience liquidity issues or become unable to process our monthly credit card transactions, it could have a material adverse effect on our business operations and financial condition |
| The loss of any of the Film Production Group’s major customers, DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal Music Group or New Line Cinema, could have a material adverse effect on its operating performance and financial condition |
| DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal Music Group and New Line Cinema are key customers of the Film Production Group |
| The loss of any of DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal or New Line Cinema could have a material adverse effect on the Film Production Group’s business operations and financial condition |
| Historically, the Film Production Group has been responsible for 25prca of the total annual erotic content purchases made by 22 _________________________________________________________________ Cinemax and 50prca of the total annual erotic content purchases made by Showtime |
| Neither DirecTV, InDemand, Showtime, Cinemax, Lionsgate, Universal Music Group nor New Line Cinema is contractually obligated to carry or purchase the Film Production Group’s programming |
| If the Film Production Group produces or acquires film content that is not well-received by its customers, it may not be able to re-coup the investment it has made in the film |
| The Film Production Group’s ability to continue to create or acquire film content that is well-received by its customers is critical to its future success |
| If a film produced or otherwise acquired by the Film Production Group does not sell as well as anticipated, the Film Production Group may not be able to re-coup its investment in the film, including, but not limited to, the cost of producing or acquiring the film and the costs associated with promoting the film |
| Historically, the average annual investment by the Film Production Group in its films has ranged from dlra1dtta5 million to dlra2dtta1 million |
| No assurance can be given that the Film Production Group’s past success in generating profits from its investment in its films will continue |
| If we are not able to retain our key executives it will be more difficult for us to manage our operations and our operating performance could be adversely affected |
| As a small company with approximately 143 employees, our success depends upon the contributions of our executive officers and our other key personnel |
| The loss of the services of any of our executive officers or other key personnel could have a significant adverse effect on our business and operating results |
| We cannot assure that New Frontier Media will be successful in attracting and retaining these personnel |
| The three executive officers’ contracts end on March 31, 2007 |
| If the three executive officers leave the Company, it may have a material adverse effect on our business operations |
| It may also be more difficult for us to attract and recruit new personnel due to the nature of our business |
| Our inability to identify, fund the investment in, and commercially exploit new technology could have an adverse impact on our financial condition |
| We are engaged in a business that has experienced tremendous technological change over the past several years |
| As a result, we face all the risks inherent in businesses that are subject to rapid technological advancement, such as the possibility that a technology that we have invested in may become obsolete |
| In that event, we may be required to invest in new technology |
| Our inability to identify, fund the investment in, and commercially exploit such new technology could have an adverse impact on our financial condition |
| Our ability to implement our business plan and to achieve the results projected by management will be dependent upon management’s ability to predict technological advances and implement strategies to take advantage of such changes |
| Negative publicity, lawsuits or boycotts by opponents of adult content could adversely affect our operating performance and discourage investors from investing in our publicly traded securities |
| We could become a target of negative publicity, lawsuits or boycotts by one or more advocacy groups who oppose the distribution of “adult entertainment |
| ” These groups have mounted negative publicity campaigns, filed lawsuits and encouraged boycotts against companies whose businesses involve adult entertainment |
| The costs of defending against any such negative publicity, lawsuits or boycotts could be significant, could hurt our finances and could discourage investors from investing in our publicly traded securities |
| To date, we have not been a target of any of these advocacy groups |
| As a leading provider of adult entertainment, we cannot assure you that we may not become a target in the future |
| Because we are involved in the adult programming business, it may be more difficult for us to raise money or attract market support for our stock |
| Some investors, investment banking entities, market makers, lenders and others in the investment community may decide not to provide financing to us, or to participate in our public market or other activities due to the nature of our business, which, in turn, may hurt the value of our stock, and our ability to attract market support |