| PRIVATE MEDIA GROUP INC ITEM 1A RISK FACTORS You should carefully consider the risks described below, together with all of the other information contained in this Annual Report on Form 10-K in evaluating our business and us |
| The risks and uncertainties below are not the only ones we face |
| Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected |
| In that case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| Our future capital requirements and needs for additional financing are uncertain |
| We believe that current and future available capital resources, including cash flow from operations, will be adequate to fund our working capital requirements based upon our present level of operations for the 12 month period following the date of this annual report |
| However, future events may cause us to seek additional capital sooner |
| If additional capital resources are required, these funds may not be available on favorable terms, or at all |
| If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to existing shareholders |
| The unavailability of funds could have a material adverse effect on our financial condition, results of operations and our ability to expand operations |
| Our business involves the provision of sexually explicit content which can create negative publicity, lawsuits and boycotts |
| Many people regard our primary business as unwholesome |
| Various national and local governments, along with religious and children’s advocacy groups, consistently propose and enact legislation to restrict the provision of, access to, and content of such entertainment |
| These groups also often file lawsuits against providers of adult entertainment, encourage boycotts against such providers and mount negative publicity campaigns |
| In this regard, our magazines, and some of our distribution outlets and advertisers, have from time to time been the target of groups who seek to limit the availability of our products because of their content |
| We expect to continue to be subject to these activities |
| The adult-oriented content of our websites may also subject us 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 websites through links to other sites and in jurisdictions that we have not previously distributed content in |
| Implementing measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness of our websites and/or their availability in various geographic areas, which could negatively impact their ability to generate revenue |
| In addition, some investors, investment banks, market makers, lenders and others in the investment community may refuse to participate in the market for our common stock, financings or other activities due to the nature of our primary business |
| These refusals may negatively impact the value of our common stock and our opportunities to attract market support |
| We face online security risks in connection with our Internet business |
| Online security breaches could materially adversely affect our business |
| Any well-publicized compromise of security could deter use of the Internet in general or use of the Internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials in particular |
| For example, events such as the November 2001 security breach of the Playboy |
| com website that allowed a computer hacker to steal customers’ credit card numbers could deter current and future subscribers from using or subscribing to our website |
| In offering online payment services, we will increasingly rely on technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as consumer credit card numbers |
| Advances in computer capabilities, new discoveries in the field of data encryption or other developments could compromise or breach the methods and procedures that we use to protect our consumers’ transaction data |
| In addition, experienced programmers may attempt to steal proprietary information or cause interruptions in our services |
| To prevent such developments we may need to expend significant capital and other resources to protect against these problems |
| Continued imposition of tighter processing restrictions by credit card associations and acquiring banks would make it more difficult to generate revenues from our websites |
| Our ability to accept credit cards as a form of payment for our online products and services is critical to us |
| There are ongoing efforts by credit card associations to restrict the processing of credit cards for online adult-related content |
| To protect against such restrictions, we must invest heavily in new technologies to protect against fraud |
| Unlike a merchant handling a sales transaction in a non-Internet environment, e-commerce merchants are fully responsible for all fraud perpetrated against them |
| - 26 - ______________________________________________________________________ Our ability to accept credit cards as a form of payment for our online products and services could be restricted or denied for many reasons, including: • Visa Tier 1 capital ratio requirements for financial institutions have significantly reduced the total dollar sales volume of Visa credit card activity that any bank can process in any given month; • if we experience excessive chargebacks and/or credits; • if we experience excessive fraud ratios; • if there is a breach of our security resulting in a theft of credit card data; • if there is a change in policy of the acquiring banks and/or credit card associations with respect to the processing of credit card charges for adult-related content; • tightening of credit card association chargeback regulations in international commerce; • banks might choose not to accept accounts with adult-related content, in a similar manner to one bank in Spain which we previously used |
| American Express has instituted a policy of not processing credit card charges for online, adult-related content |
| If other credit card processing companies were to implement a similar policy, this could have a material adverse effect on our business, results of operations and financial condition |
| We outsource our production and distribution |
| We acquire still photography and motion pictures from independent directors and we rely on third-party distributors to deliver our products to end-users through multiple distribution channels, including newsstands, the Internet and broadcasting |
| Our relationship with such directors and distributors is contractually based |
| We cannot guarantee that our contracts with directors will be fulfilled or that we will enter into new ones, in which case we may not have adequate content for our magazines and movies |
| Also, we cannot guarantee that our contracts with distributors will be renewed, in which case we may not be able to sell new products through some or all channels or into some countries |
| Failure to secure new production contracts, to secure the fulfillment of current contracts or to maintain our current distribution contracts could have a material adverse effect on our business, results of operations and financial condition |
| We are dependent upon key employees |
| Our future success depends, to a significant degree, on the continued services of our executive officers and other key personnel, including Berth Milton, Javier Sanchez and Johan Gillborg |
| We have not procured key-man life insurance and there is no guarantee that we will be able to obtain such insurance in the future should we so desire |
| Milton is the founder of our principal operating division, the Milcap Group, and has taken part in our management since the acquisition of the trademark Private in 1990 |
| We cannot guarantee that we will be successful in retaining his services in the future |
| We do not presently have employment agreements with many of our executive officers or key personnel described |
| The loss of the services of any of them or an inability to continue to attract, motivate and retain highly qualified and talented personnel, including software development technical personnel, could have a material adverse effect on our business and operating results |
| Our business is highly competitive |
| We compete in all aspects of our business, including price, promptness of service and product quality |
| We compete with a number of other businesses, offering various adult-oriented leisure-time activities, including Playboy Enterprises, Inc, Vivid Entertainment, Larry Flynt Publications, Inc |
| (Hustler), Video Company of America and Beate Uhse AG Some of our competitors have significantly greater market presence, name recognition and financial and technical resources than we do |
| In addition, these companies may develop products or services that are more effective than our products or services and/or they may be more successful than us in marketing their products or services |
| We believe that the adult entertainment market will continue to shift towards the use of explicit sexual content, our principal market, resulting in increased competition in this area of our business |
| In our Internet business, we compete with other adult media content websites as to the content of their programming and the subscription fees that are offered to members |
| In addition, if free adult media content on the Internet becomes more widely available, this may negatively impact our ability to attract fee-paying members |
| To the extent that current and potential competitors compete on the basis of price, this could result in lower margins for our products |
| We are subject to rapidly changing technology |
| We are engaged in businesses that have undergone rapid technological change over the past few years |
| Therefore, we face risks inherent in businesses that are subject to rapid technological advancement and changes in consumer demands |
| This includes the possibility that a technology that we have invested in may become obsolete, requiring us to invest in new technology |
| For example, we recently discontinued production of our CD-Rom lines and video cassette products in favor of DVDs |
| Our future success will depend, in part, on our ability to adapt to rapidly - 27 - ______________________________________________________________________ changing technologies, to enhance existing services and to develop and introduce a variety of new services to address changing demands of our consumers |
| New technological discoveries may render our equipment uneconomical or obsolete |
| As technologies change, the equipment used in our markets may become obsolete |
| As a result, we subcontract and intend to continue to subcontract capital intensive or technically complex businesses such as editing, DVD replication and other similar businesses |
| However, we may not have access to these subcontractors when their services are required, and their services may not be available on favorable terms |
| Increased government regulation in the United States or abroad could limit our ability to deliver content and expand our business |
| New laws or regulations relating to the Internet, or more aggressive application of existing laws, could decrease the growth of our websites, 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 could relate to liability for information retrieved from or transmitted over the Internet, taxation, user privacy and other matters relating to our products and services |
| For example, the US government has recently enacted laws regarding website privacy, copyrights and taxation |
| Moreover, the application to the Internet of other existing laws governing issues such as intellectual property ownership and infringement, pornography, obscenity, libel, employment and personal privacy is uncertain and developing |
| Cable system operators could also 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 operators to broadcast our programming, our operating performance would be adversely affected |
| We are currently in a significant legal dispute with the Swedish tax authority |
| In December 1999 the Company received final notification from the Swedish Tax Authority assessing its subsidiary in Cyprus for the tax years 1995-1998 for a total amount of SEK 42cmam000cmam000 (approx |
| EUR 4dtta5 million) plus fines amounting to SEK 16cmam800cmam000 (approx |
| The Swedish Tax Authority has taken the position that the subsidiary carried on business in Sweden from a permanent establishment during the period in question and should therefore be taxed on the income attributable to the permanent establishment |
| The case is under litigation and the Company believes the circumstances supporting the Tax Authority’s claim are without merit |
| However, the Administrative Court of Appeal has decided that a permanent establishment is at hand |
| The Court has only made a principle statement and the question how to calculate any eventual profit that can be allocated to the permanent establishment is not decided by the Court at this stage |
| The Company has appealed against the decision |
| The final outcome of this litigation will not be known for several years |
| Due to the early stages of this matter and the uncertainty regarding the ultimate decision, no amounts have been provided in the Company’s financial statements for this dispute |
| We face risks relating to our proprietary intellectual property rights |
| We rely on a combination of copyright and trademark laws, trade secrets, software security measures, license agreements and non-disclosure agreements to protect our proprietary products |
| Despite these precautions, it may be possible for unauthorized third parties to copy parts of, or otherwise obtain and use, our products without authorization, or to substantially use our concepts and market them, trading on our established customer base |
| Products sold over the Internet are particularly vulnerable to piracy, particularly in some developing countries |
| In addition, we cannot be certain that others will not develop substantially equivalent or superseding products, thereby reducing the value of our proprietary rights |
| Confidentiality agreements with our employees or license agreements with our customers may not provide meaningful protection for our proprietary information in the event of any unauthorized use or disclosure of that proprietary information |
| We do not believe that our products infringe the proprietary rights of third parties, and we are not currently engaged in any intellectual property litigation or proceedings |
| Nonetheless, in the future we could become the subject of infringement claims or legal proceedings by third parties with respect to current or future products |
| In addition, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights |
| We cannot be sure that any lawsuits or other actions brought by us will be successful or that we will not be found to infringe the intellectual property rights of third parties |
| In addition, to the extent we may desire, or are required, to obtain licenses to patents or proprietary rights of others, there can be no guarantee that any such licenses will be made available on terms acceptable to us, if at all |
| Enforcement of civil liabilities against Private Media Group and its management may be difficult |
| Private Media Group, Inc |
| is a corporation organized under the laws of the State of Nevada |
| Our agent for service of process in the United States is Gateway Enterprises, Inc, whose address is 3230 Flamingo Road, Suite 156, Las Vegas, Nevada 89121 |
| Presently, all of our - 28 - ______________________________________________________________________ directors and officers reside outside the United States |
| As a result, it may not be possible for investors to effect service of process within the United States upon them or to enforce, in courts outside the United States, judgments against these persons obtained in US courts based upon the civil liability provisions of the US federal securities laws |
| In addition, since the large majority of our assets are located outside the United States, any judgment obtained in the United States against us may not be collectible within the United States |
| There are risks associated with our foreign operations |
| Most of our operations are conducted outside the United States |
| In addition, our growth strategy contemplates increased services to foreign customers and to domestic customers distributing programming to international markets |
| As a consequence of the global nature of our business, we will be exposed to market risks from changes in interest rates and foreign currency exchange rates that may adversely affect our results of operations and financial condition |
| By virtue of our significant operations outside the United States, we will be subject to the risks normally associated with cross-border business transactions and activities, including those relating to delayed payments from customers in some countries or difficulties in the collection of receivables generally |
| In addition, we will be exposed to the risk of changes in social, political and economic conditions in the countries where we engage in business |
| Political and economic instability in these countries could adversely affect our business activities and operations |
| Unexpected changes in local regulatory requirements, tariffs and other trade barriers and price or exchange controls could limit operations and make the repatriation of profits difficult |
| In addition, the uncertainty of differing legal environments could limit our ability to effectively enforce our rights in some markets |
| We are subject to risks relating to performers |
| Our movie, video and photo productions are subject to US and foreign regulations which govern the terms and conditions under which sexually explicit media productions may occur |
| We have adopted practices and procedures intended to ensure compliance with these regulations |
| Although these measures are intended to protect us from liability under applicable US and foreign laws governing sexually explicit media productions, we cannot guarantee that we will not be subject to successful legal attacks in the future |
| We do not expect to pay dividends on our common stock in the foreseeable future |
| Although our shareholders may receive dividends if, as and when declared by our board of directors, we do not intend to pay dividends on our common stock in the foreseeable future |
| Therefore, you should not purchase our common stock if you need immediate or future income by way of dividends from your investment |
| We may issue additional shares of our capital stock that could dilute the value of your shares of common stock |
| We are authorized to issue 110cmam000cmam000 shares of our capital stock, consisting of 100cmam000cmam000 shares of our common stock and 10cmam000cmam000 shares of our preferred stock |
| At March 24 20, 2005, 52cmam576cmam198 shares of our common stock and no shares of our preferred stock were issued and outstanding, and approximately 3cmam595cmam186 shares of our common stock were issuable upon the exercise of options, warrants, or other convertible securities |
| Should we obtain additional financing, we may issue authorized and unissued shares of common stock at below current market prices or preferred stock that could dilute the earnings per share and book value of your shares of our common stock |
| There are risks relating to the issuance of additional shares of preferred stock, including deterring attempts by third parties to acquire us |
| Our board of directors has the authority to issue up to 10cmam000cmam000 shares of preferred stock, none of which are currently issued and outstanding, and to determine their price, and other rights, preferences, privileges and restrictions without any further vote or action by our stockholders |
| The rights of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock, including preferred stock that we may issue in the future |
| If preferred stock is issued, it may rank senior to our common stock in respect of the right to receive dividends and to participate in distributions or payments in the event of our liquidation, dissolution or winding up |
| The provisions in our articles of incorporation authorizing preferred stock could delay, defer or prevent a change of control and could adversely affect the voting and other rights of holders of our common stock, including the loss of voting control to others, which could make it more difficult for a third party to acquire control of us |
| We are controlled by existing management and shareholders |
| Our officers and directors beneficially own or control more than 50prca of our issued and outstanding stock |
| These shareholders effectively exercise control over all matters requiring approval by our shareholders, including the election of directors and the approval of significant corporate transactions |
| Their - 29 - ______________________________________________________________________ interests may differ from the interests of other shareholders and, therefore, result in corporate decisions that may be disadvantageous to other shareholders |
| This concentration of ownership may also have the effect of delaying or preventing a change in control, which could have a material adverse effect on our stock price |
| There may be adverse consequences to our shareholders and our business if our common stock ceases to be quoted on the Nasdaq Stock Market or a principal stock exchange |
| To continue to be listed on the Nasdaq Stock Market, we must maintain certain requirements |
| If we fail to satisfy one or more of the requirements, our common stock may be delisted |
| If our common stock is delisted, and does not become listed on another stock exchange, then it will be traded, if at all, in the over-the-counter market commonly referred to as the NASD OTC Bulletin Board or the “pink sheets |
| ” If this occurs, it may be more difficult for you to sell our common stock |
| In addition, under the terms of the convertible notes issued by us, the holders of these notes are entitled to accelerate the payment of these notes if we fail to maintain our listing on Nasdaq or a principal stock exchange |