-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LP5C/iXfGWVrgsG/9CJdFjU1kz+MH2qHEi5ogN3h/NYgIIMQrxEzCOJc948ry0bA ERuD2l4ve8il+DmBXS+aAw== 0000944209-98-001553.txt : 19980825 0000944209-98-001553.hdr.sgml : 19980825 ACCESSION NUMBER: 0000944209-98-001553 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980821 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIVATE MEDIA GROUP INC CENTRAL INDEX KEY: 0001068084 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 870365673 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-62075 FILM NUMBER: 98696133 BUSINESS ADDRESS: STREET 1: 3230 FLAMINGO ROAD STREET 2: SUITE 156 CITY: LAS VEGAS STATE: NV ZIP: 89121 BUSINESS PHONE: 8012729370 MAIL ADDRESS: STREET 1: 3230 FLAMINGO ROAD STREET 2: SUITE 156 CITY: LAS VEGAS STATE: NV ZIP: 89121 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on August 21, 1998 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRIVATE MEDIA GROUP, INC. (Exact Name of Small Business Issuer as Specified in its Charter) Nevada 2721 87-0365673 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Number) organization) Carrettera de Rubi 22-26, 08190 San Cugat del Valles, Barcelona, Spain 34-93-590-7070 (Address and telephone number of principal executive offices) Alfredo M. Villa, Chief Executive Officer PRIVATE MEDIA GROUP, INC. 3230 Flamingo Road, Suite 156, Las Vegas, Nevada 89121 (801) 272-9370 (Name, address and telephone number of agent for service) Copy to: Samuel S. Guzik, Esq. Guzik & Associates 1800 Century Park East, Suite 500 Los Angeles, CA 90067 (310) 788-8600 Approximate date of proposed sale to the public: As soon as practicable following the effectiveness of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------- Title of each class Proposed Proposed maximum of securities to be Amount to be maximum offering aggregate offering Amount of registered registered(2) price per share(1) price(1) registration fee - --------------------- --------------- ------------------- -------- ---------------- Common Stock, $.001 par value 4,700,000 $10.00 $47,000,000 $13,865 - ----------------------------------------------------------------------------------------------------
(1) Estimated for the purpose of calculating the registration fee pursuant to Rule 457(c) on the basis of the high and low price of the Registrant's Common Stock on August 18, 1998. (2) The amount to be registered includes an indeterminate number of shares issuable as a result of stock splits, stock dividends and antidilution provisions in accordance with Rule 416. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ PROSPECTUS - -------------------------------------------------------------------------------- PRIVATE MEDIA GROUP, INC. 4,700,000 Shares of Common Stock - -------------------------------------------------------------------------------- This Prospectus relates to the resale by the Selling Stockholders identified herein of (i) an aggregate of 4,000,000 shares of Common Stock, $.001 par value ("Common Stock") of Private Media Group, Inc. (the "Company") acquired by certain Selling Stockholders, and (ii) an aggregate of 700,000 shares of Common Stock of the Company which may be acquired by the Selling Stockholders upon the exercise of outstanding warrants at an exercise price of $4.00 per share (the "Warrants"), which are being offered for the account of the Selling Stockholders named herein. See "Selling Stockholders and Plan of Distribution." Although the Company will receive proceeds from the exercise of outstanding Warrants from time to time if and when they are exercised, the Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders offered hereby. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE FIVE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Common Stock of the Company is traded on the NASD, Inc. OTC Bulletin Board under the symbol "PRVT" and the Company has applied for listing of the Common Stock on the Nasdaq National Market. On August 18, 1998, the last reported sales price for the Company's Common Stock on the OTC Bulletin Board was $10.00. See "Price Range of Common Stock." INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN A OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE. Subject to completion, dated August 19, 1998 The Date of this Prospectus is , 1998 PROSPECTUS SUMMARY This Prospectus contains forward looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those anticipated in such forward looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes the Warrants are not exercised and gives effect to the one- for-five reverse stock split effected by the Company in November 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Securities" and Notes to Consolidated Financial Statements. The Company PRIVATE MEDIA GROUP, INC. (the "Company" or "Private/Milcap Group") is a preeminent international leader in the acquisition, refinement and delivery of adult feature products, including magazines, books, home videos and other products, all oriented to the adult entertainment market. The Company's primary business activities include: (i) creation, publishing and distribution of unrated and adult feature magazines and books, (ii) acquisition and distribution of unrated and adult feature movies in all video and disc formats, including 12" laserdisc and 5 1/4" digital versatile disc, and (iii) Internet services and other products, including CD-Rom's and licensed products. The Private/Milcap Group is the publisher of Private, the world's most popular X-rated magazine. Private was founded 33 years ago, and was the first full color, hard-core sex publication in the world. Today the Company produces four X-rated magazines: Private, Pirate, Triple X and Private Sex. In addition, a book, The Best Of Private, is released annually. The X-rated magazines are distributed on a network that covers approximately 180,000 points of sale in over 30 countries throughout the world. Since 1992, the Private/Milcap Group has acquired and distributed adult motion picture entertainment. These productions generally feature men and women in a variety of erotic and adult sexual situations. The Company's activity includes the production and financing of feature videos (full length motion pictures produced on videotape) and to some extent feature films (full length motion pictures produced on film, such as Operation Sex Siege). Their distribution is organized primarily on videocassettes (licensing or sale) and alternatively through pay television and cable programming. In the last few years, Private films, Private magazines and Private CD- Roms, have won a number of awards, including Best European Film, Best Sceenplay, Best European Director (The Pyramid won the Hot d'Or 1997), Best Foreign Release, Special Achievement Awards (AVN 1997), Best Production Company (Golden X 95), and recently Best Foreign Release and Best Director (AVN 1998). The Company) was organized in 1980 as a Utah corporation for the purpose of acquiring or merging with an established business, and has had no material business activity prior to its acquisition of Milcap Media Limited ("MML"), Cinecraft Limited and their subsidiaries in June 1998. See "Business-History." 2 The Company's principal executive offices are located at Carrettera de Rubi 22-26, 08190 San Cugat del Valles, Barcelona, Spain, telephone 34-93-590-7070. The Offering Securities Offered by the Company.............................. None Securities Offered by the Selling Stockholders................. 4,700,000 shares of Common Stock Common Stock Outstanding prior to the Offering (1).................. 8,081,668 shares Common Stock Outstanding after the Offering (1)(2).................. 8,781,668 shares Use of proceeds....................... Although the Company will receive up to $2.8 million of proceeds from the exercise of Warrants, the Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. Risk Factors.......................... The Common Stock offered by the Selling Stockholders involves a high degree of risk. See "Risk Factors." Market Symbol (3)..................... PRVT - ----------------------- (1) Based upon the number of shares outstanding as of July 31, 1998. Excludes (i) approximately 175,000 shares not covered by this Prospectus which are reserved for issuance upon conversion of outstanding warrants, and (ii) approximately 7,000,000 shares issuable upon conversion of the Company's $4.00 Series A Convertible Preferred Shares. (2) Assumes the exercise of 700,000 Warrants and the issuance of the 700,000 Warrant Shares being offered hereby. (3) The Common Stock of the Company is traded on the NASD, Inc. OTC Bulletin Board under the symbol "PRVT" and the Company has applied for listing of the Common Stock on the Nasdaq National Market. Listing on Nasdaq will occur only after all exchange requirements have been fulfilled. The Company anticipates meeting the listing requirements upon the commencement of the Offering. 3 Summary Financial Information Private Media Group, Inc. and Subsidiaries
(Unaudited) Six months ended Years ended June 30, December 31, ----------------------------- ------------------- 1998 1998 1997 1997 1996 USD SEK SEK SEK SEK (in thousands except for share data) Operating Data: Net Sales........................... 12,461 99,186 70,435 144,543 128,927 Net income (loss)................... 3,541 28,183 22,818 36,987 32,698 Net income (loss) per share Basic............................ 0.44 3.49 3.04 4.93 4.36 Diluted.......................... 0.23 1.80 1.49 2.43 2.26 Weighted average shares outstanding................ 8,081,668 8,081,668 7,500,000 7,500,000 7,500,000 Weighted average shares outstanding and assumed conversions.............. 15,643,330 15,643,330 15,264,485 15,212,882 14,500,000
(Unaudited) Six months ended Year ended June 30, December 31, ------------------ ------------ 1998 1998 1997 USD SEK SEK (in thousands except for share data) Balance Sheet Data: Working Capital..................... 8,635 68,735 48,837 Total Assets........................ 25,268 201,133 162,688 Total Liabilities................... 4,637 36,910 27,164 Net Stockholders' Equity............ 20,582 163,830 134,801
Solely for the convenience of the reader, the foregoing consolidated financial data as of June 30, 1998 and for the six months then ended have been translated into United States dollars ("USD") at the rate of SEK 7.96 per USD 1.00 the exchange rate of the Swedish Riksbank on June 30, 1998. The translations should not be construed as a representation that the amounts shown could have been, or could be, converted into U.S. dollars at that or any other rate. 4 RISK FACTORS This Prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. An investment in the Common Stock offered hereby involves a high degree of risk and is not an appropriate investment for persons who cannot afford the loss of their entire investment. Prospective investors should be aware of the following risk factors and should review carefully the financial and other information provided by the Company. Future Capital Requirements; Uncertainty of Additional Financing The Company believes that current and future available capital resources, including cash flow from operations, will be adequate to fund its working capital requirements in the ordinary course of business for the 12 month period following the date of this Prospectus. However, there can be no assurance that future events will not cause the Company to seek additional capital sooner. In addition, the Company intends to expand its business activities in the next 12 months, which will require additional sources of funding. To the extent capital resources are required by the Company, there can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's shareholders. The unavailability of funds could have a material adverse effect on the Company's financial condition, results of operations and the ability to expand its operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Growth Management anticipates that the Company will be entering a period of significant growth. This growth, if effected, will expose the Company to increased competition, greater overhead, marketing and support costs and other risks associated with entry into new markets and development of new products. To manage growth effectively, the Company will need to continue to improve and expand its operational, financial and management information systems and telecommunications systems and to hire and manage additional personnel. There can be no assurance that the Company's management team and other new personnel will be able to successfully manage the Company's rapidly evolving business, and the failure to do so would have a material adverse effect upon the Company's operating results. Reliance upon Key Employees The Company's future success will depend, to a significant degree, on the continued services of its executive officers and its other key personnel, including Berth Milton, Alfredo M. Villa, Javier Sanchez and Johan Gillborg, and upon its ability to continue to attract motivate and retain highly qualified and talented personnel, including software development technical personnel. In particular, the Company is dependent upon the management services of Mr. Berth Milton and Mr. Marten Kull. Although the Company intends to acquire key-man life insurance on the lives of Messrs. Milton and Kull naming the Company as beneficiary, the Company has not yet procured such insurance and there is no assurance that it will be able to obtain such insurance in the future. Mr. Milton is the founder of the Milcap Media Group and has managed its business and marketing operations since the acquisition of the trademark Private from his father in 1990. Mr. Milton is also a Director of 5 Private Media Group, Inc. and the chief executive officer of Milcap Media Group S.L. ("MMG") in Barcelona, Spain. The loss of the services of Mr. Milton could have a material adverse effect on the Company's business and operating results, and there can be no assurance that the Company will be successful in retaining his services in the future. Mr. Kull has managed the production and marketing operations of the Company since the inception. Mr. Kull has a long term employment agreements with the Company. Competition for such employee is intense and the process of locating key marketing and technical personnel with the combination of skills and attributes required to execute the Company's strategy is often lengthy. The loss of the services of Mr. Kull could have a material adverse effect on the Company's business and operating results, and there can be no assurance that the Company will be successful in retaining him in the long run. Mr. Kull is subject to a non-competition agreement. The loss of the services of any of the other Company's executive officers or other key personnel, including Messrs. Alfredo M. Villa, Javier Sanchez and Johan Gillborg, could also have a material adverse effect on the Company's business and operating results. As the Company does not presently have employment agreements with these individuals, there can be no assurance that the Company will be successful in retaining such personnel. As soon as practicable, the Company intends to acquire key-man life insurance on the lives of Mr. Milton and Mr. Kull, in the amount of $4,000,000 each and naming the Company as beneficiary. Competition The business of the Company is highly competitive. All aspects of its business, including price, promptness of service, and product quality are significant competitive factors and the ability of the Company to successfully compete with respect to each factor is material to its profitability. The Company competes with a number of other businesses that may have greater technical and human resources. Such companies may develop products or services that may be more effective than the Company's products or services and may be more successful in marketing their products or services than the Company. Some of the Company's current and potential competitors have significantly greater market presence, name recognition and financial and technical resources than the Company, and many have longstanding market positions and established brand names in their respective markets. To the extent that current and potential competitors compete on the basis of price, this could result in lower margins for the Company's products. Although the Company places a high value upon its demonstrated ability to provide quality service to its customers in order to be competitive in the market place, no assurance can be given that the Company will be able to compete successfully in its markets, or to compete successfully against current and new competitors as the Company's markets continue to evolve. Rapidly Changing Technology The Company is engaged in businesses that have experienced tremendous technological change over the past few years. The Company faces all risks inherent in businesses that are subject to rapid technological advancement, such as the possibility that a technology that the Company has invested heavily in, may become obsolete. In that event, the Company may be required to invest in new technology. The inability of the Company to identify, fund the investment in, and commercially exploit such new technology could have an adverse impact on the financial condition of the Company. The Company's ability to implement its business plan and to achieve the results projected by Management will be dependent, to some extent, upon Management's ability to predict technological advances and implement strategies to take advantage of such changes. The Company's future 6 profitability will depend upon its ability to adjust to such new developments. There can be no assurance that new discoveries will not render the Company's equipment uneconomical or obsolete. In order to minimize such risks, the Company subcontracts and intends to continue to subcontract capital intensive or technically complex business such as editing, video and CD-Rom duplication, DVD replication and other similar business. However, there can be no assurance that the Company will have access to these subcontractors or that such subcontractors will be available at times required by the Company or otherwise on favorable terms. Risk of Changing Markets The Company's video and film operations compete with pay-per-view cable television systems, in which cable television subscribers pay a fee to see a movie or other program selected by the subscriber. Existing pay-per-view services offer a limited number of channels and programs and are generally available only to households with a converter to unscramble incoming signals. Recently developed technologies, however, permit certain cable companies, direct broadcast satellite companies, telephone companies and other telecommunications companies to transmit a much greater number of movies to homes in more markets as frequently as every five minutes. Ultimately, further improvements in these technologies or the development of other technologies could lead to the availability of a broad selection of movies to consumers on demand at low prices, which could substantially decrease the demand for video purchases or rentals, which could have a material adverse effect on the Company's financial condition and results of operations. Intellectual Property Claims and Litigations The Company relies on a combination of copyright and trademark laws, trade secrets, software security measures, license agreements and nondisclosure agreements to protect its proprietary products. Despite the Company's precautions, it may be possible for unauthorized third parties to copy aspects of, or otherwise obtain and use, the Company's products without authorization, or to substantially use the Company's concepts and market them, trading on the Company's established customer base. In addition, the Company cannot be certain that others will not develop substantially equivalent or superseding products, thereby substantially reducing the value of the Company's proprietary rights. Furthermore, there can be no assurance that any confidentiality agreements between the Company and its employees or any license agreements with its customers will provide meaningful protection for the Company's proprietary information in the event of any unauthorized use or disclosure of such proprietary information. The Company is not aware that any of its products infringes the proprietary rights of third parties, and is not currently engaged in any material intellectual property litigation or proceedings. Nonetheless, there can be no assurance that the Company will not become the subject of infringement claims or legal proceedings by third parties with respect to current or future products. In addition, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Any such claims could be time- consuming, result in costly litigation, cause product shipment delays or lead the Company to enter into royalty or licensing agreements rather than disputing the merits of such claims. Moreover, an adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require expenditure of significant resources to develop non- infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business and operating results. To the extent the Company wishes or is required to obtain licenses to patents or proprietary rights 7 of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company, if at all. Foreign Markets The Company's growth strategy provides for increased services to foreign customers and to domestic customers distributing programming to international markets. Accordingly, the Company is increasingly subject to the risks generally associated with marketing products or services to different countries, such as currency fluctuation, political instability and the political, legislative and regulatory environment in foreign countries. The Company does not believe any of such risks have had a material impact on its business operations or financial condition, but there can be no assurance as to whether such risks will have a material impact in the future. Provision of Sexually Explicit Content The Company is engaged in the business of providing sexually explicit products worldwide. Many people may regard the Company's primary business as unwholesome. Certain investors, investment banking entities, market makers, lenders, and others in the investment community may refuse to participate in the market for the Company's Common Stock, financings, or other activities due to the nature of the Company's primary business. Such refusal may negatively impact the value of the Company's Common Stock and its opportunities to attract market support. Federal and State governments, along with various religious and children's advocacy groups, consistently propose and pass legislation aimed at restricting provision of, access to, and content of adult entertainment. These groups also may file lawsuits against providers of adult entertainment, encourage boycotts against such providers, and mount negative publicity. In this regard, the Company's magazines, and its certain distribution outlets and advertisers, have from time to time been the target of certain groups who seek to limit its availability because of its content. Although in its 35-year history, the Company has never sold a product that has been judged to be obscene or illegal worldwide, including the U.S., there can be no assurance that such sales will not be subject to successful legal attacks in the future. See "Business-Government Regulation." Risk of Liability Relating to Performers The Company's film, video and photo productions are subject to various U.S. and foreign regulations which govern the terms and conditions under which sexually explicit media productions may occur. Accordingly, the Company has adopted practices and procedures intended to ensure compliance with these regulations. In this regard, when the Company engages in the production of videos, films and photo sets, the Company contracts directly with the video or film directors or the photographer, and has no direct contractual relationship with performers or models. Generally, these productions do not take place at Company facilities. However, each of the agreements between the Company and the director or photographer, require the director or photographer to obtain written representations and documents from the models and performers to ensure that the production will comply with applicable laws governing sexually media productions, including information relating to age and health, and to furnish such information to the Company. Although these measures are intended to protect the Company from liability under applicable U.S. and foreign laws governing sexually explicit media productions, and in its 35-year history, the Company has never sold a product that has been judged to be illegal worldwide, including the U.S., there can be no assurance that such sales will not be subject to successful legal attacks in the future. 8 Fluctuations in Operating Results The Company's quarterly operating results will depend upon the timing of new product introductions by the Company. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors, regulatory actions, market acceptance of the Company's products, adoption of new technologies, and manufacturing costs and capabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." No Dividends Anticipated Private Media Group, Inc. has never paid dividends on its Common Stock and does not anticipate payment of dividends in the foreseeable future. In this regard, the Company intends to retain earnings for the foreseeable future for use in the operation and expansion of its business. See "Dividend Policy". Price Volatility The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, the market prices of the common stock of many publicly traded development stage companies have in the past been, and can in the future be expected to be, especially volatile. Announcements of new products or technical innovations by the Company or its competitors, developments or disputes concerning proprietary rights, publicity regarding actual or potential results relating to products under development by the Company or its competitors, regulatory developments in both the United States and foreign countries, and other external factors, as well as period to-period fluctuations in the Company's financial results, may have a significant impact on the market price of the Common Stock. Potential Adverse Effect of Warrants As of June 30, 1998, the Company had outstanding 875,000 Common Stock Warrants exercisable at $4.00 per share. The holders thereof have, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock without assuming the risk of ownership, with a resulting dilution in the interest of other security holders. As long as these warrants remain unexercised, the Company's ability to obtain additional capital may be adversely affected. Moreover, the warrant holders may be expected to exercise the warrants at a time when the Company would, in all likelihood, be able to obtain any needed capital through a new offering of its securities on terms more favorable to the Company than those provided by the existing warrants. See "Description of Securities." Issuance of Additional Shares of Common Stock The Articles of Incorporation of the Company currently authorize the Board of Directors to issue up to 50,000,000 shares of Common Stock. The power of the Board of Directors to issue shares of Common Stock or warrants to purchase shares of Common Stock is subject to shareholder approval in only limited instances. Accordingly, any additional issuance of the Company's Common Stock may have the effect of further diluting the equity interest of shareholders. See "Description of Securities." 9 Issuance of Additional Shares of Preferred Stock The Company's Board of Directors has the authority to issue up to 10,000,000 shares of Preferred Stock, of which 7,000,000 are currently issued and outstanding, and to determine the price, and the other rights, preferences, privileges and restrictions, without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. If such Preferred Stock is issued, it may rank senior to the Company's Common Stock in respect of the right to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Company. The provisions in the Articles of Incorporation authorizing preferred stock could have the effect of delaying, deferring or preventing a change of control of the Company, and could adversely affect the voting and other rights of the holders of the Common Stock, including the loss of voting control to others. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire control of the Company. The Company presently has outstanding 7,000,000 shares of $4.00 Series A Preferred Stock, which has certain rights, preferences and privileges which could adversely affect the holders of the Common Stock. The Company has no current plans to issue additional shares of Preferred Stock. "Description of Securities." Potential Acquisitions of Business Enterprises The Company's business plan as presently formulated contemplates growth through additional acquisitions of existing business enterprises in near the future, principally through the issuance of securities. The Company does not plan to limit such potential acquisitions to any particular industry. There can be no assurance that the Company will be able to integrate such businesses into its operations or that it will be able to operate such businesses on a profitable basis in the future. In addition, there can be no assurance that future acquisition opportunities will become available, that such future acquisitions can be accomplished on favorable terms, or that such acquisitions will result in profitable operations in the future. As the Company may issue its securities as full or partial payment for an acquisition, fluctuations in the Common Stock may have an adverse effect on the Company's ability to make additional acquisitions. Moreover, future issuances of the Company's securities could have a dilutive effect on existing shareholders. Generally, the Company's shareholders will not be required to vote on or approve acquisitions. Control by Existing Management and Stockholders As of the date of June 30, 1998, Company's officers and directors beneficially own or control more than 50% of the Company's issued and outstanding stock. Even though all holders of Common Stock are entitled to cumulate their shares when voting for directors, the present shareholders may control sufficient shares to elect most or all members of the Board of Directors and thereby control the management of the Company. See "Management," "Principal Stockholders" and "Description of Securities." Directors' and Officers' Liability Limited Under Nevada law, the Company is required to indemnify its officers and directors against liability to the Company or its stockholders in any proceeding in which the officer or director wholly prevails on the merits. Generally, the Company may indemnify its officers and directors against such liability if the officer or director acted in good faith believing his or her actions to be in the best interests of the Company, unless the director or 10 officer is adjudged liable to the Company. Furthermore, under the Company's Articles of Incorporation, a director or officer has no liability for monetary damages for breach of fiduciary duty unless such person committed fraud or engaged in intentional misconduct. See "Management--Limitation on the Liability of Directors". Possible Illiquidity of Trading; Penny Stock Rule The Common Stock of the Company is currently traded on the NASD, Inc. OTC Bulletin Board. The Company is applying to have its Common Stock listed on the Nasdaq Stock Market and anticipates that the Common Stock will be listed for trading on the Nasdaq Stock Market on the effective date of this Prospectus. However, there can be no assurance that this application will be approved and that the Common Stock will be listed on the Nasdaq Stock Market. If the Company is unable to obtain a listing on the Nasdaq Stock Market or maintain listing standards once listed, then trading, if any, in the Common Stock would be conducted in the over-the-counter market on the OTC Bulletin Board, established for securities that do not meet the Nasdaq Stock Market or other exchange listing requirements. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Common Stock. In addition, depending on several factors including the future market price of the Common Stock, Common Stock could become subject to the "penny stock" rules that impose additional sales practice and market making requirements on broker-dealers who sell and/or make a market in such securities, which could adversely affect the ability or willingness of the purchasers of Common Stock to sell their shares in the secondary market. If the Common Stock is not accepted for listing on the Nasdaq Stock Market or, if listed, is delisted from the Nasdaq Stock Market, and in either case the trading price of the Common Stock is less than $5.00 per share, such securities would likely be subject to the low priced security or so-called "penny stock" rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. For any transaction involving a penny stock, unless exempt, the rule requires: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlighted form: (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions will not apply to the Company's securities in the event such securities are approved for listing on the Nasdaq Stock Market. Potential Rule 144 Sales Of the 8,081,668 shares of Common Stock of the Company currently outstanding 3,500,000 are "restricted securities," as that term is defined in Rule 144 as promulgated by the Securities and Exchange Commission under 11 the Securities Act of 1933, as amended. As restricted shares, these 3,500,000 Shares may be resold only pursuant to an effective registration or under the requirements of Rule 144 or other applicable exemption from registration under the Act as required under applicable State securities laws. Rule 144 provides in essence that a person not affiliated with the issuer who has held restricted securities for a period of one year, under certain conditions, may sell every three months, in brokerage transactions, a number of Shares which does not exceed the greater of one percent of a corporation's outstanding Common Stock or the average weekly trading volume during the four calendar weeks prior to the sale. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the restricted securities have been held by the owner for a period of two years. A sale under Rule 144 or any other exemptions from the Act, if available, or subsequent registrations of Common Stock of the current shareholders, may have a depressive effect upon the price of the Common Stock in any market that may develop. See "Shares Eligible for Future Sale." 12 CAPITALIZATION The following tables set forth the capitalization of the Company on a consolidated basis (i) as of June 30, 1998, and (ii) as adjusted on a pro forma basis to give effect to the exercise of the 700,000 Warrants. The tables should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. June 30, 1998 -------------------------------- Actual (1) As Adjusted (2)(3) ---------- ------------------ SEK SEK Short term debt Long term debt(3) 394 394 SHAREHOLDERS' EQUITY: Preferred Stock, $.001 par value, 10,000,000 shares authorized; 7,000,000 outstanding and as adjusted pro forma Common Stock $0.001 par value, 7,997 7,997 50,000,000 shares authorized; 8,081,668 shares outstanding; 8,781,668 outstanding as adjusted pro forma (2) Additional paid-in capital 731 23,019 Retained earnings 154,991 154,991 Cumulative translation adjustment 111 111 TOTAL SHAREHOLDERS' EQUITY 163,830 186,118 Total Capitalization 164,224 186,512 (1) Derived from the Consolidated Financial Statements of the Company included elsewhere in this Prospectus. (2) As adjusted to reflect the exercise of the 700,000 Warrants and the receipt of the exercise price by the Company. (3) Does not include (i) 175,000 shares not covered by this Prospectus which are reserved for issuance upon conversion of outstanding warrants, and (ii) approximately 7,000,000 shares issuable upon conversion of the Company's $4.00 Series A Convertible Preferred Shares. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes and "Summary Financial Data" included elsewhere in this Prospectus. June 30, 1998 Compared to June 30, 1997 Net sales. The Company reported net sales of SEK 99.2 million for the six months ended June 30, 1998 which, compared to net sales of SEK 70.4 million for the six months ended June 30, 1997, represents an increase of SEK 28.8 million, or 40.8%. The increase was primarily attributable to increased video sales due to two factors; a higher output of new video releases, 32 titles in 1998 compared to 19 titles in 1997 and an increase in the number of video titles available for back-catalogue sales. Sales of magazines and CD-ROM remained approximately the same in 1998 as in 1997. Cost of Sales. The Company reported cost of sales of SEK 46.7 million for the six months ended June 30, 1998, which compared to cost of sales of SEK 31.2 million for the six months ended June 30, 1997, represents an increase of SEK 15.5 million, or 49.8%. The gross profit for the six months ended June 30, 1998 was SEK 52.5 million, or 52.9% of net sales, which compared to gross profit for the six months ended June 30, 1997 of SEK 39.3 million, or 55.7% of net sales, represents a decrease of 2.8% in gross profit in relation to net sales. This increase is the result of product mix. Selling, general and administrative expenses. The Company reported selling, general and administrative expenses of SEK 24.0 million for the six months ended June 30, 1998, which compared to selling, general and administrative expenses of SEK 15.9 million for the six months ended June 30, 1997 represents an increase of SEK 8.1 million, or 50.5%. The increase was attributable to non-recurring moving and organization expenses related to the relocation of several departments of the Swedish subsidiary to the subsidiary in Spain, non-recurring expenses associated with the planned registration of the Company on NASDAQ and the Company's investment in Internet related activities. The relocation is expected to be completed during 1998. The investment expenses associated with Internet activities are expected to continue in 1998. Interest expense. The Company reported interest expense of SEK 0.13 million for the six months ended June 30, 1998 which, compared to interest expense of SEK 0.07 million for the six months ended June 30, 1997, represents an increase of SEK 0.06 million. The small increase is the result of higher average short- term borrowings outstanding in 1998 compared to 1997. Income taxes. The Company reported income tax of SEK 0.2 million as compared to an income tax expense of SEK 0.4 million for the six months ended June 30, 1997. Net income. The Company reported net income of SEK 28.2 million as compared to SEK 22.8 million for the six months ended June 30, 1997. The increase in net income in 1998 of SEK 5.4 million was primarily attributable to increased sales. 14 1997 Compared to 1996 Net sales. The Company reported net sales of SEK 144.5 million for the year ended December 31, 1997, which, compared to net sales of SEK 128.9 million for the year ended December 31, 1996, represents an increase of SEK 15.6 million, or 12.1%. The increase was primarily attributable to increased video sales due to two factors; a higher output of new video releases, 43 titles in 1997 compared to 36 titles in 1996, and an increase in the number of video titles available for back-catalogue sales. Sales of magazines and CD-ROM remained approximately the same in 1997 as in 1996. Cost of Sales. The Company reported cost of sales of SEK 75.7 million for the year ended December 31, 1997, which, compared to cost of sales of SEK 67.0 million for the year ended December 31, 1996, represents an increase of SEK 8.7 million, or 13.0%. The increase in cost of sales approximates the increase in net sales of 12.1%. The gross profit for the year ended December 31, 1997 was SEK 68.9 million, or 47.6% of net sales, which, compared to gross profit for the year ended December 31, 1996 of SEK 62.0 million, or 48.1% of net sales, represents a decrease of 0.5% in the gross profit margin. This small decrease is the result of product mix. Selling, general and administrative expenses. The Company reported selling, general and administrative expenses of SEK 33.7 million for the year ended December 31, 1997, which, compared to selling, general and administrative expenses of SEK 27.0 million for the year ended December 31, 1996, represents an increase of SEK 6.6 million, 24.6%. The increase was attributable to non- recurring moving and organization expenses related to the relocation of several departments of the Swedish subsidiary to the subsidiary in Spain, and the Company's investment in Internet related activities. The re-location is expected to be completed during 1998. The investment expenses associated with Internet activities are expected to continue in 1998. Interest expense. The Company reported interest expense of SEK 0.32 million for the year ended December 31, 1997, which, compared to interest expense of SEK 0.26 million for the year ended December 31, 1996, represents an increase of SEK 0.06 million. The small increase is the result of higher average short-term borrowings outstanding in 1997 compared to 1996, partially offset by reduced long-term borrowings. Income taxes. The Company reported income tax benefit of SEK 2.1 million for the year ended December 31, 1997 as compared to an income tax expense of SEK 2.0 million for the year ended December 31, 1996. The decrease of SEK 4.1 million is primarily attributable to more of the Company's profits being recorded in tax jurisdictions where there is no corporate tax. Net income. The Company reported net income of SEK 37.0 million as compared to SEK 32.7 million for the year ended December 31, 1996. The increase in 1997 net income was primarily attributable to increased sales and SEK 2.1 million in tax benefits, partially offset by higher net interest expense of SEK 0.3 million. LIQUIDITY AND CAPITAL RESOURCES The Company reported a working capital surplus of SEK 48.8 million for the year ended December 31, 1997, an increase of SEK 13.3 million compared to the year ended December 31, 1996. 15 The increase is principally attributable to increased accounts receivable related to increased sales and increased inventories. This trend continued at June 30, 1998 when working capital surplus increased to SEK 68.7 million as a result of further inventory increases and reduced short-term borrowings. Net cash provided by operating activities was SEK 44.7 million for the year ended December 31, 1997 and was primarily the result of net income and adjustments to reconcile net income to net cash flows from operating activities. The net income of SEK 37.0 million and the adjustments to reconcile net income to net cash flows from operating activities, representing amortization of photographs and videos of SEK 20.2 million and depreciation of SEK 1.4 million offset by deferred taxes of SEK 2.8 million, provided a total of SEK 55.8 million. The total of SEK 55.8 million was then primarily reduced by the increases in trade accounts receivable and inventories totaling SEK 21.9 and offset by SEK 10.7 million from prepaid expenses and other current assets, accounts payable trade, income taxes payable and accrued other liabilities. Net cash provided by operating activities was SEK 51.3 million for the year ended December 31, 1996. The decrease in cash provided by operating activities in 1997 compared to 1996 is principally the result of changes in operating assets and liabilities in 1997. Net cash used in investing activities for the year ended December 31, 1997 was SEK 38.5 million. The investing activities was principally the investment in library of photographs and videos of SEK 25.9 million which was carried out in order to maintain the 1997/1998 release schedules. In addition to investment in library of photographs and videos, SEK 11.1 million was invested in other assets where a deposit on certain land and building represents the main activity (see note 6). Net cash used in financing activities for the year ended December 31, 1997 was SEK 6.3 million represented by SEK 6.6 million in dividends and long-term repayments on loans SEK 0.4 million offset by an increase in short term borrowings of SEK 0.8 million on the line of credit. The Company has historically relied on positive cash flows from operations to finance working capital needs and investing activities. The Company's expansion plans will require additional sources of funding. The Company plans to meet these funding requirements through a combination of increases in short- term credit lines, additional long-term borrowings and/or equity financing. 16 BUSINESS History The parent company, Private Media Group, Inc., was originally incorporated in 1980 as a Utah corporation under the name Glacier Investment Company, Inc. for the purpose of acquiring or merging with an established company. In 1990, the Company changed its domicile to the State of Nevada. On March 3, 1997, the Company undertook an offering of its Common Stock and warrants pursuant to Rule 504 of Regulation D. Subsequently, the Company entered into an agreement with Electric Entertainment Corporation ("EEC") to acquire EEC and the Company changed its name to Electric Entertainment International, Inc. This transaction was abandoned in November 1997. In December 1997 the Company changed its corporate name to Private Media Group, Inc. and declared a one for five reverse split of its Common Stock. On December 19, 1997 the Company entered into acquisition agreements with Milcap Media Limited (the "Milcap Acquisition Agreement") and Cinecraft Limited (the "Cinecraft Acquisition Agreement") to acquire all of their outstanding capital stock in exchange for 7,500,000 shares of Common Stock, 7,000,000 shares of the $4.00 Series A Preferred Stock, and 875,000 Common Stock purchase warrants. These acquisitions were completed on June 12, 1998. For the terms of the securities issued in this transaction see "Description of Securities." The "Company" is sometimes referred to herein as Private Media Group, Inc., Milcap, Private, the Milcap Media Group, or the Private/Milcap Group, and includes Private Media Group, Inc. and its recently acquired subsidiaries: Milcap Media Limited ("MML"), Cinecraft Limited, Milcap Publishing Group AB, Sweden ("MPG"), Milcap Media Group S.L. ("MMG"), Milcap Publishing Group Italy Srl, AB Normcard, and Private France S.A. General Information The Private/Milcap Group is a pre-eminent international leader in the production, publishing and delivery of adult feature products, including magazines, books, home videos and other products, all oriented to the adult entertainment market. The Company's primary business activities include: (i) creation, publishing and distribution of unrated and adult feature magazines and books, (ii) acquisition and distribution of unrated and adult feature movies in all video and disc formats, including 12" laserdisc and 5 1/4" digital versatile disc, and (iii) Internet services, and other products, including CD-Rom's and licensed products. In the last few years, Private films, Private magazines and Private CD- Roms, have won hundreds of awards such as Best European Film, Best Sceenplay, Best European Director (The Pyramid won the Hot d'Or 1997), Best Foreign Release, Special Achievement Awards (AVN 1997), Best Production Company (Golden X 95), and recently Best Foreign Release and Best Director (AVN 1998). The Private/Milcap Group currently distributes its products in the following countries: Sweden, Denmark, Estonia, Latvia, Poland, Russia, the United Kingdom, Germany, the Netherlands, Belgium, the Czech Republic, Slovenia, Austria, Switzerland, Italy, Greece, France, Spain, Portugal, Canada, the U.S.A., Mexico, Chile, Brazil, Paraguay, Uruguay, Argentina, South Africa, Zimbabwe, Malawi, Botswana, Namibia, the Seychelles, Japan, Australia and New Zealand. The distribution in these countries is conducted primarily by the leading national independent distributors. 17 Magazine Publications The Private/Milcap Group is the publisher of Private, the world's most popular X-rated magazine. Private was founded 33 years ago, and was the first full color, hard-core sex publication in the world. Today the Company produces four X-rated magazines: Private, Pirate, Triple X and Private Sex. In addition, a book, The Best Of Private, is released annually. The X-rated magazines are distributed on a network that covers approximately 180,000 points of sale in over 30 countries throughout the world. Furthermore, an in-house magazine, X-rated News, is produced from time to time; this magazine is mainly aimed to present informative news about the Company's activity to its clients and their customers. The Company's two newest magazines are Private Style and Private Life, which are produced with the same first-class quality as its older sisters, but are significantly different when compared with the other four highly successful magazines, as they are the first "soft-core" magazines in the Private/Milcap Group. Video and Film Productions Since 1992, the Private/Milcap Group has acquired and distributed adult motion picture entertainment. These productions generally feature men and women in a variety of erotic and adult sexual situations. The Company's activity includes the acquisition of feature videos (full length motion pictures produced on videotape) and to some extent feature films (full length motion pictures produced on film, such as Operation Sex Siege). Their distribution is organized primarily on videocassettes (licensing or sale) and alternatively through pay television and cable programming. The Company always maintains the ownership, copyrights and administration of every film it finances and produces. Currently, the Company produces 60 X-rated and 8-12 R-rated movies per year and the distribution is through a world-wide network that covers approximately 50,000 sales points. The first two monthly video labels released were Private Film and Private Video Magazine. Both labels quickly received critical acclaim in leading international magazines as well as numerous prestigious industry awards. The next three monthly video labels successfully introduced were Triple X, Private Stories and Private Gold. In May 1997, the Company introduced Gaia, a new label released bi-monthly. Earlier this year, the Company introduced the labels Pirate, Casting X, Private Special Edition and Triple X Files, which are released monthly, and Private Black Label, which is released bi-monthly. The Company currently owns a total of more than 180 movie titles, and by the end of 1998 the total is expected to increase to over 210 titles. Titles are available mainly on videocassette and are sold by distributors, primarily to retail stores and wholesalers worldwide. Some of the original motion picture programs have also been re-edited and licensed to cable television operators. The Company owns perpetual distribution rights, and thus far has not acquired any third party distribution rights. The Company continues to expand the marketing of its production into new international markets, including the United States, generally by entering into national license agreements with local distributors. During fiscal 1998, Management hopes to continue to expand its video and film operations by (i) distributing new videos and films with an aggressive release schedule, (ii) increasing its efforts to distribute its library and new titles into cable and satellite television markets as well as new international markets, and (iii) actively seeking to acquire distribution rights to additional titles produced by third parties. 18 Other Markets CD-ROM/DVD. Although the adult CD-Rom market has been leveling out for the last few years, Private PC Games, Interactive Adventures and CD-Rom Magazines have increased sales due to high gaming and media qualities. During 1998, the Company expects to increase its CD-Rom releases to 2-3 per month. Earlier this year, the Company also started to release its movie titles on DVD. Sales of DVD titles are expected to add to the already established sales per title. Licensed Products. In April 1996, the Company launched a line of adult pleasure products called Private Collection. In the near future, the Company plans to extend the product range with various additional lines such as clothes, nutritional supplements, energy soft drinks and personal skin care. For all these new markets, the Company is generally planning to earn royalties through the licensing of its major trademarks. Internet. The Company's Internet team has combined Private quality with the newest technology to create one of the best adult Web sites ever: www.private.com. Since March 1998, the WWW Club members are able to view every Private magazine published by the Company since 1965 and over 180 clips from over 60 films. In addition, this site contains new games, chat rooms with models, previews of new releases and more. The Company believes that as of today it has the capacity and the best technology available to distribute movies via satellite link in this fast growing market and plans to commence this distribution via the Internet in August 1998. 19 THE ADULT ENTERTAINMENT INDUSTRY Despite nearly two decades of intense political campaigning against the adult industry, consumer purchases of adult entertainment products have increased dramatically. The industry that has come to be known broadly as adult entertainment began its transformation two decades ago, with the advent of home videos and the VCR. That revolution marked the beginning of the end of red-light districts in cities, where adult book-stores, X-rated theatres, peep shows, dingy strip joints and street prostitution once flourished. During the 1980s, the availability of adult movies on videocassette and on cable television helped to legitimize the consumption of explicit material by putting it in the home setting. The result has been the legitimization of industry products by other businesses not traditionally associated with the adult entertainment industry. Video stores, long distance telephone carriers, satellite providers, cable companies, and even mutual funds, earn significant returns by supplying or investing in adult entertainment either directly or indirectly. The distribution of sexually explicit material is intensely competitive. Hundreds of companies now produce and distribute films to wholesalers and retailers, as well as directly to the consumer. The low cost of videotape and the introduction of low cost video tape recorders, along with the minimal production budgets of many adult films, has resulted in much lower barriers for entry in the adult entertainment industry, while the availability of adult films on videocassette has virtually destroyed the adult theatre business. According to industry sources, in 1978 some 100 hard-core feature films were produced at a typical cost in today's dollars of approximately $350,000, while in 1997 nearly 8,000 new hard-core videos were released, some costing as little as a few thousand dollars to produce. The bulk of this production is represented by amateurish tapes and compilations. The Company is competing with a small segment of the market, which involves the production of professionally produced films with high production value, which probably represents approximately ten percent of the market. 20 As of today, the U.S. and worldwide revenues of the adult entertainment market have been estimated and broken down by the Company, as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Market Segment World Est. Sales 1998 U.S. Est. 1998 Comments - ------------------------------------------------------------------------------------------------------------------------------------ Adult Videos $ 18.8 billion $ 4.6 billion Retail Sales Strip Clubs $ 4.5 billion $ 3.2 billion (1) Magazines $ 7.5 billion $ 1.2 billion (2) Phone Sex $ 4.5 billion $ 1.1 billion Escort Services $ 10.0 billion $ 1.3 billion Cable/Satellite/Pay-Per-View $ 1.5 billion $ 0.4 billion (3) CD-Rom $ 1.0 billion $ 0.4 billion Internet (sales and memberships) $ 0.5 billion $ 0.3 billion Novelties $ 0.9 billion $ 0.3 billion Others $ 0.8 billion $ 0.2 billion TOTAL $ 50.0 billion $13.0 billion (4) - ------------------------------------------------------------------------------------------------------------------------------------ Notes (1) It is mainly a U.S. market (approximately 2,500 clubs in the U.S. only) (2) Including softcore magazines such as Playboy, Penthouse or Hustler (U.S.) (3) i.e. The Playboy Channel, Spice and Adam & Eve in the U.S. (including hotel's pay-per-view) (4) Illicit markets not included - ------------------------------------------------------------------------------------------------------------------------------------
According to a recent industry report which appeared in US News and World Report (released on February 10, 1997), Americans spent over $8 billion in 1996 on hard-core videos, peep-shows, live sex acts, adult cable programming, sexual devices, computer porn and sex magazines. This amount is much larger than Hollywood's domestic box office receipts and larger than all the revenues generated by rock and country music recordings. The mainstream Hollywood film industry collects some $6 billion per year, the recorded music industry $8 billion; theater, opera and ballet $1.7 billion. Only the magazine industry with its $11 billion in U.S. sales is still competing with the adult industry for the same fraction of the entertainment budget. Video Sales & Rental The Los Angeles Times (November 22, 1997) confirmed that sales and rental of adult videos have increased 100% in the last five years. It added that "seventy percent of VCR buyers in the first three years during which the devices were on the market said that being able to view adult movies at home was a primary reason they bought a VCR." The Video Software Dealers Association ( VSDA ), the trade association for the entire home video industry, estimated that more than 60,000 retail outlets in the United States carry home videos; adult videocassettes are carried in more than 25,000 of these retail outlets, including such major chains as The Wherehouse, Tower Video, Palmer Video, Movies Unlimited, West Coast Video and others. In addition, hundreds of small boutiques and large mail order companies sell adult tapes directly to consumers. On the other hand, the 5,000-store Blockbuster Video, 21 which accounts for 30% of the rental marketplace, like many other large retail chains, has opted not to carry adult videos. Both Adams Media Reasarch and the Video Software Dealers Association, estimated that the overall US home video industry rental exceeded $7.3 billion in revenues in 1997, while the U.S. home video rental and sales for the same year, exceeded $16.2 billion. AVN (Adult Video News), the world's largest adult entertainment industry trade publication which releases an annual poll of approximately 19,000 US retailers who subscribe to the AVN magazine, estimates that in 1997 hard-core tapes generated over $828 million in adult video sales, while rental and sales volume in video stores and adult stores, excluding mail orders, represented a volume of $4.2 billion.
- ------------------------------------------------------------------------------------------------------------------------------------ Year Rental & Sales (1) % Increase Number of Titles (2) No. Rentals (3) $ Sales (4) - ------------------------------------------------------------------------------------------------------------------------------------ 1985 1,600 1986 1,500 1987 1,300 1988 1,250 1989 1,300 1990 1,275 1991 1,575 410 1992 1,600 2,200 445 1993 2,100 31% 2,475 490 1994 2,500 19% 3,224 528 664 1995 3,100 24% 5,575 609 707 1996 3,900 26% 7,852 665 787 1997 4,200 8% 7,970 est. 697 828 - ------------------------------------------------------------------------------------------------------------------------------------ Notes (1) In millions of dollars (in video stores and adult stores; does not include mail orders) (2) Includes features, 30 & 60 minutes tapes, amateurish tapes, re-releases & compilations (hardcore only) (3) All Stores (statistics through 1995 included only general video store) in millions of videotapes rented (4) Wholesale sales of adult videotapes (Sales in million of dollars in U.S.A., approx.) Source: AVN's 1998 Adult Entertainment Guide - ------------------------------------------------------------------------------------------------------------------------------------
Overall, AVN reports that adult products represent 13.49% of the U.S. video market (all stores, whether stocking adult or not). More than 15% of the nations's rental and sales transactions involving adult tapes took place in the State of California; approximately 2,800 retail stores carry adult video for sale and/or rental in the State of California; the average store in the State of California stocks over 700 different adult tapes for rental. According to AVN's poll, 71% of adult videos are rented by men, 19% are rented by male/female couples, 7% are rented by male couples, 2% are rented by women and 1% by women couples. Approximately 20 major producers, such as Private, Vivid, VCA and Metro release the lion's share of adult high budget videos; around eighty smaller firms fill in the gaps. See "Business-Competition." 22 - -------------------------------------------------------------------------------- Year % Rentals (1) % Rental & Sales (2) - -------------------------------------------------------------------------------- 1991 11.5 20.7 1992 11.75 22.6 1993 11.1 21.6 1994 12.9 27.5 1995 13.3 28.1 1996 13.1 27.8 1997 13.49 25.4 - -------------------------------------------------------------------------------- Notes (1) Adult percentage of video market, all stores (whether stocking adult or not) (2) Adult percentage of rentals and sales (exclusively in stores that carry adult products) Source: AVN's 1998 Adult Entertainment Guide - -------------------------------------------------------------------------------- Cable and Satellite TV Broadcasting The adult entertainment industry has continued to grow as technological advances allow easier and more private access to products. Most major hotel chains, including Sheraton, Marriott, Hyatt, Holiday Inn and Hilton, offer in- room non-explicit adult programming through video services such as Spectravision and On Command, which in 1997, according to US News and World Report, represented over $175 million in sales in the U.S. alone. On Command is the largest of the hotel pay-per-view companies and is in more than 3,150 hotels comprising 916,000 individual rooms. On Command reported revenues of over $60.9 million in the second quarter of 1998. Over 800,000 rooms served by On Command can get on-demand pay-per-view. This means that patrons can choose from a selection of as many as 50 general and adult features, with the requested feature starting upon the guest's request, rather than waiting for a scheduled start time. Softcore adult is a mainstay of hotel pay-per-view systems, primarily because companies can buy unlimited rights to titles for a specified period of time, like three years for $5,000. Outside the U.S., except for more restrictive countries such as Japan and the United Kingdom, guests can often gain access to hard-core pay-per-view as well. Cable companies such as Time Warner, TeleCommunications, Inc., and Cablevision Systems offer softcore services like the Playboy Channel. Other cable companies such as, American Cable Entertainment, Comcast Corporation and Greater Media offer explicit adult programming, such as that available from Spice and Exxxtasy Networks. According to public documents, the Playboy and Spice channels have generated as much as $200 million in revenue from cable and DTH satellite services during their latest fiscal year. The Big Four US cable providers are: TCI (Tele-Communications, Inc.), Time Warner Cable, MediaOne and Comcast. TCI is the largest U.S. cable provider, with over 16 million subscribers in 49 States. Nationwide, TCI systems offers Playboy TV, AdulTVision, Adam & Eve and Spice. Time Warner Cable has 12.3 million subscribers in 37 States, including over one million homes in New York City alone, and offers Playboy TV, Adam & Eve and Spice. MediaOne is the third largest cable provider with 4.8 million subscribers. In order of popularity nationwide 23 it offers Spice, Playboy TV and Adam & Eve. Comcast is the number four cable TV provider in the U.S. with 4.3 million subscribers in 21 States; its local Philadelphia area provider offers Playboy TV and local stand-alone pay-per-view channels. Besides the softcore adult-oriented channels such as Playboy TV, AdulTVision, Spice Channel and The Adam & Eve Channel, there are seven hardcore video channels available in the U.S. exclusively on the C-Band dishes (large 7 1/2' to 10' satellite antennas), which are: Eurotica, Exotica, Exxxtasy, True Blue, X!, Xxxcite and XXXplore. Exotica, Exxxtasy and True Blue (New Frontier Media, Inc.) offer uncensored hardcore material. Exxxtasy is the only U.S. hardcore adult channel being beamed to Australia and the Pacific Rim. Earlier this year Playboy Enterprises, Inc. and Spice Entertainment Companies, Inc. entered into an agreement resulting in the combination of the two companies. Also, Colorado Satellite Broadcasting, a subsidiary of New Frontier Media, Inc., is scheduled to launch TEN: The Erotic Network on a 24 hour basis on September 1, 1998, with an estimated 2-3 million households in North and South America initially having access to this channel. Less-explicit material routinely available on a variety of cable television networks acts to reinforce consumer demand. Subsequently, the Company believes that the adult entertainment industry in general will continue to experience significant growth in the coming years, particularly as advances in technology will allow more private and secure adult access to adult themed material. CD-Roms CD-Roms burst onto the scene about five years ago and is now estimated to represent $300 million-a-year. This includes films and sexually oriented interactive games (Source: Boston Sunday Globe). Some industry observers believe that the market for adult CD-Roms has peaked. According to others, toning down the packaging will make it possible to expand sales while tapping music store chains, as well. Internet According to CommerceNet/Nielsen Media Research - Internet Demographic Study- Fall 1997 Release, among persons 16 and over in the U.S. and Canada, 52 million are Internet users in the U.S. and 6 million are Internet users in Canada. Of these users, 43% are women, 80% own or lease a home computer, 77% have a credit card in their name, 49% have at least a college associate degree and 46% live in households with total annual income over $50,000, of which 10 million are considered to be regular online buyers. On a worldwide basis, it is estimated that over 125 million people currently have access to the Internet; by the year 2000 there are expected to be over 450 million users of the Internet. An estimated 160 million HTML pages can now be viewed on the Internet, with 500 million projected by the year 2000; the worlwide median user income for Web surfers is over $65,000 per year. According to Interactive Advertising, Inc. (iab.com), advertising revenues on the Internet accounted for $906.5 million in 1997, up 240% from 1996; 67% were collected by the top ten generic sites and search engines such as Yahoo; as far as the bulk of the advertising was concerned, adult oriented banners probably represented the lion's share. 24 Most of this data can be consulted online and on a weekly basis, through interactive media audience measurement services such as Media Metrix, Inc. (www.mediametrix.com), WebSideStory, Inc. and Web21 (100 hot Web Sites), which all deliver comprehensive usage statistics, clickstream patterns and demographic data to help clients evaluate and demonstrate the value of all new interactive media. Inter@ctive Week now evaluates the adult entertainment business at $1 billion for banner advertising, subscriptions, videoconferencing and products. A more conservative figure from Forrester Research Inc. is $185 million in adult online entertainment in 1998, up from $101 million in 1996 and $137 million last year. That is a pittance compared with the $4.8 billion Forrester forecasts for total online retail this year, but it is a big number to those involved. Estimates of the number of sex sites are as diverse as estimates for traffic and revenue. Yahoo lists about 4,000 sites under "sex." but current estimates indicate that there may be as many as 28,000 sex sites, half commercial, the other half hobby sites. Adult Chamber of Commerce's Kraft guesses there are 20,000 distinct owners, with many more sites. According to WebSideStory's Adult 10000, there were 13,673 sites listed, averaging 16,041,825 visitors per day on August 5, 1998. Pay sites have most of the adult content on the Internet, but free sites abound for obvious reasons: advertising from pay sites supports most of them. Free sites get a few cents for each viewer who "clicks" on an advertising banner; the banner transports these viewers to a site that tries to entice them into surrendering their credit card numbers. Some sites offer commissions rather than flat fees for customer referrals. Though this sounds like small change, some free sites do well. - -------------------------------------------------------------------------------- Adult Entertainment Revenues on the Internet Year Tot. Online Retail Tot. Online Entertainment Adult Entertainment 1997 $2.4 billion $298 million $137 million 1998 $4.8 billion $591 million $185 million 1999 $7.9 billion $1.14 billion $235 million 2000 $12.1 billion $1.92 billion $296 million Source: Forrester Research Inc., People & Technology Strategies Report, October 1997 - -------------------------------------------------------------------------------- There are many other specialized directories and search engines for the adult world, though many of the Internet's general search sites include sex as well. Webpower Inc., a large supplier that pays for referrals to its services, says it is the largest paying advertiser on Yahoo's and Excite Inc.'s search sites. Webpower's sites include Amateur Hardcore, The Hardcore Channel and FastPorn. Amateur Hardcore may be the largest adult pay site for the time being; it claims 250,000 pictures and 500,000 members. Webpower also says it has 6,000 actively linked Webmasters to which it pays a total of $25,000 to $40,000 per week for referrals or click-throughs. One of the largest hosts of adult sites is Bell Technologies Group of New York, a public entity started in 1989, which claims to be the largest provider of adult hosting on the Internet. Unlike Bell, many information service providers ("ISP's") do not want adult operators for a variety of reasons. Some say they reject the traffic 25 because adult sites use enormous bandwidth just a few hours a day. That means providers would need to invest heavily for largely unused capacity. Others don't want to be associated with unsavory content. The tremendous growth of the Internet, including chat rooms and Web sites dedicated to adult entertainment, has resulted in millions of potential customers accessing these sites from the relative privacy of their personal computers, worldwide. Web porn has become an explosive issue that unsettles everyone, from the religious right to anti-censorship liberals. It sparks debates about free speech vs. child protection; free enterprise vs. social good; and free markets vs. fair business practices. Parents, politicians, preachers and providers are all struggling with how to best protect children while allowing grown-ups to set their own standards of behavior and taste. The access to most of the Web sites is far from being regulated. At the user's discretion, the following Web locations provide information about blocking adult material, mainly for child protection: cyberpatrol, solidoak, netnanny, shepherd, safesurf and/or netpart. Phone Sex Phone sex represents, by conservative estimates, a $1 billion dollar industry in the U.S. only. AT&T is one of the biggest carriers of phone sex. Many in the industry believe phone sex will be outpaced by computer video- conferencing, video streaming or live streaming, but for the time being, according to the above mentioned U.S. News report, every night, between the peak hours of 9 p.m. and 1 a.m. a quarter of a million Americans pick up the phone and dial a number for commercial phone sex. The average call lasts six to eight minutes and the charge ranges from 89 cents to $4 a minute. In 1991, the FCC restricted the type of adult calls that could be made to numbers with a 900 prefix, banning obscene communications for commercial purposes, but no such restriction applys to overseas calls, which can easily be made from most telephones. 26 The Company's Numbers The Company is currently considered as being the world leader in hard-core magazines and is considered to be one of the world's top three producers of high budget adult video products. The following table indicates the Company's production for 1997 and the estimates for 1998. - -------------------------------------------------------------------------------- THE PRIVATE LIBRARY - -------------------------------------------------------------------------------- MAGAZINES As of December 31, 1997 As of December 31, 1998 (Est.) --------- ----------------------- ------------------------------ Titles No of Issues No of Issues Yearly Private 144 150 + 6 Pirate 46 52 + 6 Triple-X 20 26 + 6 Sex 11 17 + 6 Total 221 245 24 New Releases - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VIDEOS As of December 31, 1997 As of December 31, 1998 (Est.) ------ ----------------------- ------------------------------ Labels No of Titles Private Video Magazine 26 26 No more in production Private Film 28 28 No more in production. Triple-X Video 32 32 No more in production. Private Video Stories 27 27 No more in prod. Private Gold 25 33 + 8 Gaia 4 7 Ended during 1998 Casting-X 3 12 + 9 Best of Private 6 8 + 2 Private Black Label 6 New from 1998 Pirate 12 New from 1998 Triple-X Files 12 New from 1998 Special Compitalations 10 New from 1998 Amanda's Diary 1 New from 1998 Private Kamasutra 1 New from 1998 Total 151 212 61 New Releases in 1998 - -------------------------------------------------------------------------------- 27 MAGAZINE PUBLICATIONS The Business The Company's publishing operations include the publication of the above mentioned adult magazines, and occasionally the publication of newsstand specials, calendars and paperback books. All these magazines, together with all local editions are printed under various tradenames and are distributed in approximately 30 countries worldwide. The Company publishes several editions of the main magazines; all editions contain the same editorial material but provide local targeted content, in full cognizance of local governmental regulation regarding explicit adult publications. Most of the Company's magazines feature pictures of men and women engaged in erotic and sexually explicit situations; the Company's most popular publications include Private, Pirate, Sex and Triple X. Private Style, published in South Africa since 1997, and Private Life, published in Greece in 1998, are currently the only softcore magazines. Private Style is edited, printed and distributed by the South African distributor and is currently in its fourth issue. Private Kontakt began publication in Germany in May 1998, through a joint venture between the Company and its German distributor. Private Kontakt represents the Company's first attempt to penetrate a very large market for this kind of publication in Germany. There are currently two other long established German contact magazines: Autofahrer Week End and Happy Week End, which are produced by two of the Company's German competitors. - -------------------------------------------------------------------------------- Quantities of Magazines Produced (1997) Private 702,450 Pirate 521,450 Triple X 504,350 Sex 327,500 Best of Private 44,830 - -------------------------------------------------------------------------------- The Company's publications offer a balanced variety of features and have all gained a loyal customer base and a reputation for excellence by providing a quality standard to the adult market industry, while maintaining circulation leadership as the best-selling hardcore magazine. All publications have long been known for their graphic excellence and features, and publish the work of top artists and photographers. They are also renowned for their pictorials of beautiful people. Because of the Company's high quality standards, its magazines are among the highest priced magazines in the industry. All of the Company's publications are printed by independent third parties. The Company has had a longstanding relationship with a printer in Spain, and two other printers in the U.S. and in the U.K. respectively; these last two are also printers of other adult magazines that compete with the Company's products; nonetheless, Management believes that generally there is an adequate supply of printing services available to the Company at competitive prices, should the need arise. All of the Company's production and printing activities are coordinated through its operating facility, Milcap Media Group S.L., located in Barcelona, Spain. 28 Circulation The Company's magazines have historically generated most of their revenues from firm sales distribution to national distributors. Distributors with rights to return and retail circulation represent less than 25% of the current production. The Company has contracted national licensing agreements in over 30 countries and normally deals with a magazine distributor for every local distribution of its publications. Single copy retail sales normally occur in adult book stores and similar establishments. Newsstand retail sales are legally allowed only in countries such as Sweden, Denmark, Holland, Belgium, France and Italy. Distribution of the magazine to newsstands and other public retail outlets is accomplished through a network of national distributors, who maintain a local network of several wholesale distributors and licensors. Copies of the magazine are shipped in bulk to the wholesalers, who are responsible for local retail distribution. Wholesalers of Back Catalogue are normally allowed to handle returns from National Newsstand Networks on firm sales; this practice is only allowed for magazines, while almost no return practice is allowed for videos and CD-Roms. The distribution of the Company's magazines is handled exclusively by distributor pursuant to individual distribution agreements. Such agreements are normally subject to yearly automatic extensions, unless either party delivers a termination notice. Normally, distributors also provide the Company with other services, including management information and promotional and specialty marketing services, and their marketing representatives usually solicit national, regional and local retailers in an effort to expand the number of retail outlets for the Company titles. The Company recognizes revenue from distributors sales based on estimated copy sales at the time each issue is delivered. Provisions for expected returns are taken into consideration. The historical patterns of distribution have changed as a result of the on- going consolidation and the relationship with each distributor, which due to the success of the publications and better terms and conditions, tend to prefer a firm sale agreement as well. For a few years, the Company has been seeking to expand the use of its magazines' editorial content and other assets across different media formats, in order to capitalize on their existing brand names at a lower cost. The process started in 1995 with the production of CD-Roms, but the main development will be the re-editing of every Private magazine since 1965, which became available on the Company's Web site in May 1998. Production Distribution and Fulfillment Most of the Company's magazines and video covers are currently printed by an independent printer in Spain pursuant to a long dated gentlemen's agreement. On April 1, 1998, the Spanish printer confirmed its latest pricing policy offer for printing and binding FOB Barcelona. Prices are subject to the alteration of the price of raw materials (paper, ink, etc.) on the date of printing. Terms of payment are 60 days from the date of invoice. The Company believes that its relationship with the Spanish printer is good. However, it believes that other printers of similar quality could be engaged on similar terms and that its high volume of printing, could enable it to 29 receive more favorable printing rates. The Spanish printer belongs to a large Spanish printing group and has preparations and the capability to minimize recovery time, in the event of a disaster at the existing printing facility. With respect to color separation, pre-press and related services, the Company is currently using the services of two independent providers located in Barcelona, Spain; the Company believes that there is generally an adequate supply of alternative color separation services available at competitive prices, should the need arise. All proprietary magazines are printed in and shipped from Barcelona, Spain with the exception of the two following national distributors. Private USA, Inc. receives the color separations from the Barcelona office and then runs the printing of its own copies through a U.S. printer. The U.S. printer is printing Private, Pirate, Triple-X and Sex for the U.S., Mexican and Canadian markets. The U.K. distributor receives all the magazines in digital format, prepares its own layout and color separations before printing locally adapted editions of the Private and Pirate magazines. To some extent, the actual print run varies each month and different amounts are printed for each publication. The amount of printed publications is determined bimonthly with the input from each of the Company's national distributors. The principal raw material necessary for the publication of the Company's magazines are coated and uncoated paper. The Company's printers have a number of paper supply arrangements and believe that those supply contracts provide an adequate supply of paper for its needs and that, in any event, alternative sources are available at competitive prices. Paper prices are affected by a variety of factors, including demand, capacity, pulp supply, and by general economic conditions. In any case, pulp and paper only represents approximately ten percent of the magazine's total cost and its price does not generally have a major impact on the production cost. Most of the Company's products are packaged and delivered directly by the printer or supplier, but fulfillment, warehousing, customer service and payment processing are conducted principally by Milcap Media Group S.L. Milcap Media Group S.L. employs a staff of professionals to manage the production and to oversee the printing, distribution and fulfillment of its magazines. The Company is able to effectively produce and distribute all of its publications, through the use of state-of-the-art design and production technology, economies of scale and, in printing contracts, efficiencies in subscription solicitation and fulfillment. Production systems for both graphics and editing utilizes an integrated publishing environment that is networked with satellite offices. Approximately 15 employees of the Company are engaged in the production and distribution of the Company's publications. Licensed Publishing The Private Style publication is owned by JT Publishing Pty, the South African distributor, who will start paying a royalty as soon as the final distribution of the magazine will be up an running. There have been two issues of Private Style on the market so far. A final royalty agreement is expected to be finalized before the end of 1998. The Private Life publication is owned by D&L First Publishing Group Ltd., the Greek distributor, who will start paying a royalty as soon as final distribution of the magazine will be up and running. There have been two issues on the market so far. A final royalty agreement is expected to be finalized before the end of 1998. 30 Local publishing licensees will tailor their editions by mixing the work of the Company's editors with their own editorial and pictorial material. The Company will monitor the content of the licensed editions so that they retain the distinctive style, look and quality of the other editions, while meeting the needs of their respective markets. 31 VIDEO AND FILM PRODUCTIONS In fiscal 1992, the Company began releasing feature videos and films under the Private label. The Company's titles are considered to be among the best adult movies available on the market. Due to the recent success of titles such as The Pyramid 1-2-3, The Fugitive 1-2 and Tatiana 1-2-3, there is a great consumer expectation for every new release. The retail success of the Company's production can easily be checked by consulting ratings and sales on some of the industry's monthly publications such as AVN (for the US market), Hot Video (for the French market) and Video Impulse (for the Italian market). The Company's adult video or film products are in genres similar to its general magazines and books. Because of the strong demand for this genre of productions, the Company is able to fairly evaluate the international distribution of every production and earn a quick return on its investment. Normally, the Company's acquisition costs range between $25,000 and $125,000 per movie, prior to the computation of the post-production, duplication and distribution costs. Generally, MMG creates and designs all artwork for promotional items and packaging and contracts for printing services. Since 1997, all videocassettes have been duplicated by independent laboratories. The Company and several of the Company's original programs, have recently won awards of excellence, including Best Production Company awards, and a Special Achievement award. The Company continues to expand its video operations in international markets and is presently marketing video products in over 30 countries worldwide. The Company finances all of its adult films and videos, and arrangements with video and film producers are done on a flat fee basis; all producers generally take care of all production costs and obligations, including among other things, the delivery of models' releases. The principal source of financing for all the motion pictures derives from the cash flow generated by previous productions. To date, the Company has not solicited any external financing for any of its acquisitions. Distribution rights may be limited to specified territories, specified media and/or particular periods of time. Most of the Company's original programs have been licensed to cable television networks and adult pay-per-view channels. In these circumstances, the Company generally grants the TV channel owner a specific right of transmission and always retains the intellectual property rights of every production. Additionally, new technology, primarily digital set-top converters, will dramatically increase channel capacity, and is expected to contribute to the sales of adult video. The Company is currently developing a video streaming software to allow pay-per-view of its productions through it Web site. See "Business-Internet." Motion pictures shot on film generally offer better production quality, utilize more elaborate production techniques and incur higher acquisition costs than motion pictures shot on videotape. Many of the Company's new feature video and film releases are edited into several versions depending on the media through which they are distributed. In general, versions of the videos or films edited for cable or pay-per-view television are less sexually explicit than the versions edited for home video distribution. The Company has experienced significant competition from lower cost competitors with respect to film and video. While there can be no assurance that the Company will be able to maintain its current market share, it believes that the strong brand recognition and the quality of its titles will result in the ability to appeal more 32 effectively to a broader range of adult audiences. The format of Private videos is consistent with the style, quality and focus of the Private brand. The Company believes that the quality of content and production will continue to differentiate the Company from its competitors. Distribution The Company distributes its productions worldwide via Beta masters, videocassettes, laserdiscs and DVD's that are sold or rented in video stores, sex shops, newsstands and other retail outlets, and occasionally, where allowed, through direct mail. The Company's Web site recently contributed in boosting video sales and Management expects this new media to become one of the main distribution channels in the future. During the last six years, the Company entered into several distributorship agreements in approximately 30 countries worldwide. Pursuant to these distributorship agreements, either MPG or occasionally MMG, provides monthly a minimum number of new titles during the term of the agreement, and a licensee normally serves as the exclusive distributor throughout its own country or language territory. Under the various distributorship agreements, licensees are normally required to purchase a minimum number of units for each monthly period during the term of the agreement. Typically the licensees then customize, dub or subtitle the movie, as appropriate, to meet the needs of individual markets. In countries such as the U.S. and Germany, the Company has expanded its relationships with its national distributor by entering into exclusive multi-year multi-product output agreements. Private USA, Inc. for instance, coordinated the incorporation of PCI Private Collection International, Inc. which in 1995 became the worldwide distributor of the Company's novelties collection. In another case, VPS Film Entertainment GmbH, Munich recently entered into a joint venture agreement for the launching of the Company's contact magazine. In countries such as France and Italy, the Company established local subsidiaries for the purpose of owning or controlling the local distribution. In the near future, the Company intends to renegotiate some of its national distributorship agreements in order to vertically integrate the Company into its chain of distribution. In general, national distribution agreements enable the Company to have an ongoing branded presence in international markets and generate higher and more consistent revenues, rather than selling on a direct basis. Video Duplication/Production Techniques Betacam masters are produced by Milcap Media Group S.L. and Milcap Publishing Group, and from there they are sent to the different distributors and duplication centers. Certain distributors receive a master directly and do their own duplication. All artwork to print the video covers is created at Milcap Media Group S.L. Most of countries receive their own ready printed covers from Spain and some countries print their own covers. Body labels for the videocassettes are printed in Spain, and then mailed to the different distributors. All of the body labels have a golden stamping for the control of pirate copies. 33 CD-ROMS AND INTERACTIVE GAMES The Software Publisher's Association estimated that the number of CD-Rom households by the end of calendar 1997 was 45 million worldwide (30 million in the U.S. market alone), growing approximately 50% from the previous year. This growth has been primarily fueled by the availability of multimedia computer systems. In addition, 60% of all new computers purchased are being shipped with built-in CD-Rom drives. CD-Rom products enable viewers to enjoy full-screen, full-motion CD-Rom visual display. In the last few years, the Company entered into partnerships with companies to create multimedia products, such as Video CD-Rom titles and several kinds of Video Photo Discs and Interactive Games. Management has determined that it is more efficient and cost effective to engage independent contractors to digitize and convert the Company's motion pictures into the CD-Rom format and to acquire proprietary distribution rights to CD-Rom interactive games authorized by independent software developers. Accordingly, during 1997, the Company reduced its Swedish in-house technical workforce and contracted the product development process to outside specialists. The product development process includes design, prototyping, programming, computer graphic design, animation, sound and video recordings and quality assurance. The Company has and expects to continue to utilize third-party designers, artists and programmers to introduce creative and technically superior products. Due to the technological complexity, inherent uncertainty in anticipating technological developments, the need for coordinated efforts of numerous technical personnel in such development, and the difficulties in identifying and eliminating errors prior to product release, the success of software product development is unpredictable. The Company has and intends to continue to digitize and convert selected titles from the Company's existing film library to the CD-Rom format under the trade name Private. It has financed and it will continue to finance the development of technically sophisticated products on the most popular personal computer platforms, currently Microsoft Windows 98 and the hybrid Windows/Macintosh platform, primarily for use in home personal computers. Production Distribution and Fulfillment Preparation of master CD-Rom discs, user manuals and promotional materials, as well as duplication of the CD-Rom discs and printing of the user manuals and packaging, has been and will continue to be performed by outside developers. Management does not anticipate experiencing any material difficulties or delays in the manufacture and packaging of its products. Distribution of CD-Rom disc products is accomplished through the same distribution network of wholesalers and retailers through which the Company distributes its magazines and adult video products. Sales of consumer software are highly dependent on the availability of relatively inexpensive personal computers. Major computer manufacturers have continued to enhance their lower-end product offer to consumers by increasing the power and speed of these machines without significantly increasing the price. As indicated above, the inclusion of CD-Rom technology in home personal computers and the decline in prices for CD-Rom hardware is expected to contribute to the demand for CD-Rom software products that can utilize the graphics, sound and data capabilities of the latest hardware technology. 34 The Company has no way of accurately assessing the amount of capital resources that will be required to develop these future projects, or the amount and extent of financing that will be available to meet these requirements. The development of these kinds of products incurred minimal operating costs during fiscal 1997 and have been financed through the cash flow generated by the various operations. CD-Rom Duplication Techniques During fiscal 1997, the Company reduced its Swedish in-house technical workforce and contracted the product development and duplication process to outside specialists. CD-Rom Library Although the Company intends to focus on digitizing selected titles from its existing film library for the foreseeable future, it will continue to be engaged in the development and distribution of other adult-theme digital multimedia projects such as interactive games. Presently, the Company's CD-Rom library can be described as follows: Private Photo CD-Rom Discs This includes Private Collection (Vol. 1-4) and other similar CD-Roms. The program's floating control panel makes it easy to browse through more than 2,000 color-pictures included on each CD-Rom. This type of CD-Rom is easy to use and has graphical interfaces including interactive menus and slide shows with background music. CD-Rom Interactive Adventures and PC Games This includes CD Sampler, Hard Core Gallery and Private CD-Rom Magazine. These types of CD-Rom's are digitally encoded in MPEG/Quick Time Format to ensure the highest available quality, integrated with sound, and at the touch of a fingertip, users can find a vast selection of the Company's films and magazines. Private CD-Rom Magazines are hybrids that play both on PC/Windows and on Macintosh computers. The user of these interactive CD-Roms interacts and decides what will or will not happen on the screen and has total control over the actual events. Private Pleasure Park 1 & 2 (both best foreign titles at the AMEE 1995 and 1996), Private Investigator (awarded 1996 Best Interactive Game at the AMEE Award Show in Las Vegas), Private Prison and Private Castle are examples of this type of production. The Company's PC games represent the state-of-the-art in advanced arcade PC games. The games combine exciting and challenging top level computer games with hard-core or R-rated movies and pictures. The PC games run in a PC/Windows environment and are compatible with Windows 98. Pornmania and Porntris, which has been the best selling adult PC-Game in Europe since 1994, are just two examples of this kind of production. The Company is competing with other CD-Rom producers such as VCA Interactive, Disk Magic, Arcus Media Group, Digital Playground, PIXIS Interactive, Venus Interactive and New Machine Publishing. Future product releases by the Company will be dependent on the continued market acceptance of its initial product releases, which, for the time being, is very positive. 35 OTHER ANCILLARY PRODUCTS AND SERVICES The Laserdisc Market According to the LaserDisc Association, as of January, 1997, approximately 2.2 million U.S. households owned a laserdisc player. The worldwide laserdisc household figure is estimated to be 12.0 million with the heaviest concentrations in Japan, Taiwan, Hong Kong, Singapore, Malaysia and Indonesia. The LaserDisc Association estimates that the installed base of laserdisc households in the U.S. will grow at a rate of 25% per year for the next three years and then see little or no growth as the next Video Disc technology takes hold (see "DVD Markets"). Laserdisc is primarily a sell-through business (not much rental activity ) and caters to upper-income households with home-theater installations. Laserdisc employs an analog video technology along with a digital sound technology to deliver twice the resolution of ordinary home video cassettes. Laserdisc's popularity has grown over the past ten years among movie enthusiasts for its "instant access" capabilities (similar to audio CD) and its durability as a movie playback medium. Laserdisc's disadvantages include its size (12 inches in diameter), high retail price, and the limited amount of information that can be placed on a single side of a disc (60 minutes maximum). For the calendar year ending 1996, the LaserDisc Association reported that the average U.S. laserdisc household purchased twelve laserdiscs. The LaserDisc Association further estimated that between five and ten percent of all laserdisc purchases had strong sexual content and themes. Presently, the Company has only released approximately six of its titles on laserdisc format. Due to the structure of its current network of distributors, the Company is not emphasizing the production of laserdiscs, which represents some sales on the U.S. and a quite small market in Japan. Private Video Magazine 2, 3, and 4 and Private Film 6 (Lady in Spain) are still available on laserdisc format. Since December 1997, most of the new releases are now edited on DVD as a complement to the classic video format. The Digital Versatile Disc Market ("DVD") The market for Digital Versatile Disc ("DVD") is expected to grow dramatically beginning in the fourth quarter of 1998. Up until September 1995, two competing technologies existed for DVD video playback: TimeWarner/Toshiba's technology and SONY/Philips' technology. In September 1995 these companies agreed upon a unified format for DVD. In October 1996 a unified, single standard was finalized for the mastering (with copy protection) and replication of DVDs. It is widely believed that this unified DVD format will make serious inroads into the market shares currently held by laserdisc and, to a much greater extent, the video cassette recorder. DVD has several major advantages over competing home video delivery technologies: 1) A single 5 1/4" DVD can hold up to 135 minutes per side of high resolution digital full-motion video and audio (DVD discs contain information on both sides); 2) Instant access is available to a favorite scene; 3) DVD contains significantly higher image and audio quality than laserdisc and video tape; 4) Multiple language tracks can be incorporated on one disc; 5) Since DVD is 100% digital (video and sound), the cost of replication is comparable to CD-Rom or audio CD at under $1.00 per unit in small press runs; and 6) A relatively low replication cost will translate to a retail price for a motion picture of under $20.00, giving this medium tremendous mass- market potential. Experts at Toshiba estimate that the market for DVD software could exceed $20 billion by the year 2005. Estimates made by Panasonic indicate that hardware sales range from 800,000 to one million DVD households by the calendar year ending 1997, and 5 million to 10 million domestic DVD households by the calendar year ending 1999. The earliest hardware segment to adapt to DVD will most likely be the computer hardware industry. The next evolution of the CD-Rom drive, 36 now standard equipment for all multimedia computer systems, will be the DVD-Rom. Similar to a CD-Rom in most respects, the DVD-Rom will be capable of holding more than ten times more information than a CD-Rom. Management believes that the market for feature-film and video on DVD will initially consist of computer users with DVD-Rom drives. Dataquest estimates that nearly five million multimedia computer households will be equipped with a DVD-Rom drive by the year 2000. The Company's DVDs are produced, encoded and programmed in the U.S. Replications for the US market are made in the US, while worldwide replication and distribution is arranged by the Spanish operation. There are currently only a few of the Company's DVD titles available on the market. The best selling of them is the Pyramid Trilogy. It is still premature to evaluate the real potential of this market, since it's still mainly a U.S. market, and currently there are less than 500,000 owners of DVD players in the U.S., according to recent estimates. THE PRIVATE COLLECTION The Market The Company, together with some of its licensees, is currently working on the development, marketing and distribution of high-quality branded merchandise. The Company's already licensed product lines include clothing, novelties, accessories, fragrances, small leather goods, eyewear, nutritional supplements, aphrodisiacs and condoms. These products are marketed principally through mail- order and retail outlets, including department and specialty stores. In addition the Company is testing a merchandising initiative to place targeted products in mass market outlets with high traffic in order to attract new customers not familiar with the Company's brand name. The Private Collection On November 30, 1995, Milcap Media Limited entered into a license agreement with Private Collection International, Inc. ("PCI") in Los Angeles, California, and granted the licensee the worldwide rights to own, operate, distribute, subcontract, market, advertise and promote merchandise including, rubber goods, vibrating products, pumps, electric items, lotions, lubricants, potions, aphrodisiacs, realistic rubber and latex productions, condoms, dolls, jelly products, massagers, playing cards and all other items that fall into these product groups, except the rights to greeting and trading cards, leather and other apparels and lingerie which have been licensed on a non-exclusive basis. The term of the agreement is seven years. In consideration for the rights granted, the licensee agreed to pay a royalty equal to ten percent of the gross product receipts. The licensee agreed, among other things, to pay a guaranteed minimum royalty of $100,000 for the first year of term, $200,000 for the second year of term and $400,000 for the third year of term. In March 1998 the Company agreed to amend the original license agreement accepting, among other things, a flat $175,000 fee for the 1997 calendar year and a modification in the royalty calculation. Payment of this amount has been personally guaranteed by the owners of PCI and is payable on or before July 30, 1999. These amendments were justified by the difficult financial conditions of PCI that originated from a higher than expected inventory of goods. Sales of PCI in 1996 were $769,266 and sales of PCI for 1997 were $1,492,044. Independently from this sharp increase in sales, PCI continues to seek to identify the best possible selling goods in a very sensitive market, which is currently represented by some 5,000 to 6,000 different items available to consumers and no official statistics as far as what the consumers really purchase in retail stores. Another obstacle is 37 represented by the fact that PCI's main supplier, Doc Johnson, Inc. Van Nuys, California, is positioned as a quasi-monopoly in this industry worldwide, and requires cash payment for most deliveries. Nutritional Supplements, Drinks and Other Similar Products In October 1997 the Company entered into a licensing agreement with RH- Patent & Original AB of Hagersten Sweden, an international agency of St. Raphael, Inc., a U.S. production entity, with the intent to expand the market for nutritional supplements such as Private Passion, Private Kick, Cold Relief, Metabolize 2000, Sleep Eeze, Maxi Charge, and personal care products such as Brazilian Bronze, Waistline Management, Cellulite Regulator Gel and Tight Factor. The licensee has labeled existing government approved products such as guarana-based energy drinks and aphrodisiacs, with Private, Private Passion and Private Kick, to be distributed within the current distribution network as well as in new markets. These products are also promoted for mail order and on the Internet. In consideration for the rights granted, the Company is entitled to receive a percentage of the products gross receipts, i.e. 15% up to 10,000 total items, 20% on direct sales (mail order via licensor) and 15% on every gross sale by distributors. Minimum sales for automatic renewal of the contract are $100,000 for 1998, $200,000 for 1999, and $400,000 for 2000. The Company agreed to provide the licensee with a minimum advertising space on its Web site. The Company is currently negotiating with an Austrian producer of energy drinks and a final agreement is expected to be signed. So far, DYNAMITE Getrankevertriebbesellschaft m.b.H. of Graz, Austria, has delivered a first order of 100,000 prototype cans of a new energy drink named Private Dynamite. The Company created the design which includes the Private logo and pictures of models labeled on the can. This drink is similar to the original Dynamite currently on the market, but the recipe has been changed by adding ginseng and other ingredients. This first order was delivered for approximately $.31 per can. Larger orders on better conditions, together with distribution agreements, may be finalized if the drink is well received by the markets under review. The priority markets are Spain and Germany. The rest of Europe and the U.S. are expected to follow during the fourth quarter of 1998. Private Circle, Inc. During the last few years, the Company invested in the production and distribution of promotional casual clothing such as: T-shirts, sweat shirts, rugby shirts, polo shirts, pique shirts, shorts, wind breakers, beach towels, swim suits, training suits, sunglasses, belts, shirts, bath robes, sweaters, trousers and baseball caps. Some of the production was sold by the Company's distributors, but most of it was given away as marketing tools. In May 1998 the Company entered into a Letter of Intent with Mr. Danny Cook and Ms. Quamilla Carlsson, two fashion designers d/b/a Zabata Clothing, Los Angeles, California. Subject to the terms and conditions of a definitive agreement, which has not yet been entered into, the Company would grant to designers, the non-transferable and exclusive license to use the trademarks in connection with the manufacturing, distribution and marketing of their collection. At the same time, the Company would acquire all of the assets of Zabata Clothing for $35,000 and enter into a joint venture to form a new entity to pursue a new clothing business. The initial paid-in capital is $115,000, 80% of which would belong to the Company and the remaining 20% would belong to the designers. In addition, the designers will enter into a two year employment agreement and receive a salary of 38 $4,000 each in exchange for a full time employment. Lastly, designers will each receive 7,500 two year Warrants at an exercise price of $10. Private Circle, Inc. was incorporated in June 1998; the Company will represent the majority of the Board of Director of this corporation. A final agreement is expected to be executed no later than October 1, 1998. A catalogue and a video introducing the first Private Circle Collection was distributed at the Cannes Festival in May 1998. INTERNET SERVICES The Present In fiscal 1997, the Company launched its own site on the Internet ( www.private.com ), which is now one of the Internet's most visited destination sites. Taking full advantage of the technological capabilities of the medium, the private.com site contains several editorial features from the Company's magazines and select photos from various pictorials. The Company's site also promotes and sells the product range: magazines, videos, CD-Roms and collections. The Company recently implemented its Internet division by adding new hardware and a satellite connection to the backbone of the Internet in the U.S., in order to administer increased traffic to the private.com site. The new hardware and software are of the latest technology, which may also help attract additional advertisers to the site by providing an opportunity to target a focused market from underdeveloped related sites. Private.com, which represents over 1,000 Web pages, is currently generating a traffic of approximately 18,000 unique visitors and more than 300,000 impressions per day. The members' area is yielding up to 30 new members every day paying a yearly fee of $100 and as of July 31, 1998 there were over 2,000 active members of private.com. The mailing list of the WWW Club exceeds 45,000 addresses of inactive members and there are approximately 100 new addresses per day added to the list. Private WWW Club members are allowed to view thousands of pictures on the site. Major attractions include x-files, pictures designed in new formats, such as photosets with pictures never shown before, slide shows and search engines providing the member to pick their "dream pictures". The site is constantly updated with new material and the full archive of every Private magazine that has been published and clips from all Private videos ever edited. Licensees The Company licenses the right to use its trademarks and photo and video library to third parties, such as the owners of the following Web sites: privategold.com, sex.se, privateusa.com, private.com.ar, private.com.au, maxs.se and clubx.com.au, which are either licensees or independent distributors. In December 1997, Milcap Media Limited entered into an Internet license agreement with Cyber Entertainment Network, Fort Lauderdale, Florida (CEN), whereby CEN, being in the business of developing and operating various Web adult sites, was granted use of the Web site privategold.com. The Company is providing the site with adult images and videos and is entitled to receive 25 percent of the gross revenues from fees collected with the sale of memberships to the site. The current revenue stream to Private exceeds $20,000 per month. 39 The Company is using its best efforts to increase the number of virtual shops, while developing a template to better present and sell its products. The Company has registered several Web domain names, such as www.privatelive.com and www.privatecinema.com; it anticipates starting business activities on such unused Web sites during the third quarter of 1998. The Future In the future TV will be used to deliver Internet content and PCs will be used to deliver TV programming; there will be a need for special devices for specific Internet applications. The Internet is moving from a static world to a live, multi-media world rich in animation, audio and video. The goal of the Company is to take advantage of its enormous proprietary content and to develop as many interactive devices as the public demands. Management believes that no other competitor is positioned in such a way to be able to provide fast and high quality vehicles and high quality content at the same time. In March 1998, Milcap Media Group S.L. hired Mr. Wouter Swiers and Mr. Hans Waasdorp, two of the developers of software such as StreamCam, Video on Demand, Sream Mirror and SecureWebPay. Nowadays the Internet gets faster and faster, people get used to the new medium and lose their patience with complicated Web sites. As of today, many video applications on the Internet need some kind of plug-in in order to function properly. This means that people first have to go somewhere else, download a program, install it and then restart their machines. This normally means that a lot of people just leave the targeted Web site and go to other places. After 1.5 years of work, Mr. Swiers and Mr. Waasdorp and their team finally managed to produce a streaming video application that is fully browser compatible. The application doesn't need a plug-in software and is actually faster than most of the other programs that are currently on the market. Their software also works on local network systems and Intranet systems. The application, which was named Stream Mirror Software, was subsequently upgraded to allow streaming video and sound files without plug-ins in any browser, Normally, you need a huge Internet connection in order to broadcast streaming video and allow a lot of people to watch at the same time. The Stream Mirror Software can be hooked up to multiple mirrors and distribute the signal to all clients without slowing down the connection sending the signal. In addition, it uses a pay per second system. This system is fully database driven and very secure. The SecureWebPay application allows the Company to process credit card transactions and the card is checked on the fly, while sharing fraud databases with banks (all this information is highly encrypted). Privatelive.com (Project) All software has no limitation concerning maximum users connecting at the same time; it only depends on the hardware that will provide it to the customers and the capacity of the lines. As of today, the Company's servers are connected to a full optic redundant DS 3 connection (100 Mbits/sec transmitting), which means that with 50% capacity it will be possible to serve more than 1,000 customers at the same time. The site is expected to be up and running during the third quarter of 1998. PrivateCinema.com (Project) The system transmission for Private Cinema is practically the same as for the Private Live project. Private Cinema will provide customers with all published video titles available. The videos will be edited and cut into 10 to 12 minutes stories; the customer can first watch a free 15 to 30 second preview also containing a commercial part as well. Clients will get the option to buy the stories either separately or as a package deal. Both services are being tested and are expected to be available in the third quarter of 1998. 40 STRATEGIES General To capitalize on its international name recognition, the Company continues to increase its international product marketing activities, specifically targeting growth for its licensing business and several other activities. The Company's marketing strategy is to license and/or distribute its high-quality publications and adult home videos worldwide. Additionally, the Company licenses its trademarks for use on various consumer products, such as apparel, trendy streetwear and accessories, cosmetics and beverages. The Company's business and operating strategy is designed to provide strong revenue growth and increase profitability by improving the performance of existing titles, launching and/or acquiring additional publications and developing other ancillary revenue streams, either proprietary or under license agreements, in order to better capitalize on its internationally-recognized brands and efficient operations. In addition to this, the Company is planning to achieve growth through acquisitions of existing business enterprises. The structure of the adult entertainment industry is such that there are just a few large corporations, and the Company believes that none of them have an international presence as the Company does. In addition, just a few of these corporations are publicly traded, and the Company believes that none of these publicly traded companies have the financial capability and the market liquidity necessary to attract other businesses under merger or acquisition agreements. Management believes that because its Common Stock is publicly traded and the Company's international presence, it will be in a position to acquire many of the hundreds of privately owned adult entertainment businesses, which typically have limited financing and personnel, and who often, as a result of limited capital resources, have no other alternative but to continue their business as it is. Management believes that, as a public company, it will be able to attract privately held acquisition candidates at a much lower price/earning multiple than that of the Company. For the time being, the Company is starting a process of vertical integration and plans to take control of some of the territories in which it has granted licensing agreements. At the moment, only the French and Italian speaking territories operate as the Company's subsidiaries. Initial target markets are Scandinavia, the United States and South America. On May 5, 1998, in furtherance of the Company's vertical integration strategy, the Company entered into a Letter of Intent with Max's Film AB, Stockholm, Sweden, which among other things, is also acting as the Company's distributor for Scandinavia. The Letter of Intent provides for a stock acquisition of all of the assets, library, trademarks and other rights to the intellectual property used by Max's Film AB in its activities. The closing of this transaction, which is expected to occur in October 1998, is subject to the consummation of a definitive agreement. In the near future, the Company expects to enter into similar agreements with other distributors or direct competitors. 41 Marketing By using its core publications as platforms for launching new "spin-off" publications, the Company has efficiently developed and produced a diverse and profitable portfolio of highly-specialized adult publications. The Company believes that it has a competitive advantage as a result of its editorial staff's ability to identify potential markets for new publications and the Company's ability to gain access to newsstand distribution channels has enabled its new publications to become better established in several new markets. In relation to the video distribution the strategy is to increase sales of sell- through cassettes on a worldwide basis and to launch additional labels in order to increase profits. All of the titles in the Video Library will also become available on DVD and this will most likely add to the already established sales per title. Furthermore, the Company is currently negotiating to start up broadcasting of material that will be adapted to what is legally accepted in each territory. Internet For the past three years, the Company has put most of its efforts into expanding on the Internet. For this purpose the Company hired highly qualified people and set up a separate entity. The prime objective for the new entity is to offer the most unique services available on the "net" such as: video-on- demand (privatecinema.com) and live-sex (privatelive.com). The Internet entity will offer services both for the Company and its products and for other companies in the Internet marketplace. The Company believes that the new entity will be a strong revenue provider and that the Internet will compete with home video viewing in the future. See "Internet Services." Operations Management has identified and implemented operating improvements that have resulted in significant cost savings through personnel reductions, lower lease costs, tighter purchasing procedures and controls and restructuring the Company's relationships with its principal vendors. In addition, the Company adopted a new operating policy that provides for one or more of the following actions if any of its publications generate continued losses: (i) discontinue or sell such magazine; (ii) merge such magazine with the Company's existing magazines; or (iii) enter into strategic partnerships with third parties. The Company will remain focused on identifying additional operating improvements to further increase its operating efficiencies and profit margins. Miscellaneous The Company believes that there are numerous opportunities to increase ancillary revenues by leveraging the editorial content and the internationally- recognized brands of the Company's existing publications through worldwide licensing arrangements, strategic joint ventures, retail alliances, affinity group marketing, electronic software and games. 42 DISTRIBUTION METHODS, PRICE POLICIES AND PIRACY PROBLEMS Distribution Methods and Price Policies a. National Newsstand Networks The distribution of magazines, videos and CD-Roms is based on an agreed allocation, VAT excluded, based upon the cover price between the Company and the National Newsstand Network. Advantages These distributors are very easy to deal with as they manage themselves most of the time; they have solid companies and are most reliable; they also generally pay on time. This distribution method is also a very good instrument when the Company wants to run statistics on sales, as it can get a good input on the situation regarding every local market. As far as magazines are concerned, this type of agreement can allow the distribution of the highest volume of copies on a specific market. As a result of reaching many local retailers and sales points throughout the territories, it also brings the best margin per copy. Disadvantages Magazine distributors with a right to return the products can create some problems for the Company, but on the other end, returns do not really go wasted, as these are purchased by distributors who only handle old issues of the product (See: Wholesalers of Back Catalogue). As far as video distributors are concerned, a right to return the products is not beneficial for the Company, as it is not always easy to sell the returns (custom made, per language and layout). The end-user price obtainable for CD-Rom products through this distribution channel is 30-50% lower than for traditional CD-Rom channels (the maximum end-user price obtainable is 150- 200% of a magazine cover price distributed through the same channels). This market is most suited for some older products (12-36 month), where the consumer cut price will not affect the market price in the other distribution channels. There is still not the same market for CD-Rom return products as there is for traditional magazines, i.e. distributors who only deal with old issues of the magazines (See: Wholesalers of Back Catalogue/Magazines). The duplication price of a CD-Rom combined with the extra packaging costs for adding the CD-Rom to the cover of a magazine or similar product carrier (needed in most countries for distributive/regulative purposes), adds to the total cost of each product; CD-Roms are in this case more sensitive for damages from transportation and need to be handled with care throughout the return process. For all products, a common disadvantage of this distribution method is that the conditions of payment are in general quite long, i.e. between 90 and 180 days. b. Wholesalers Advantages For magazines, videos and CD-Roms, this is the traditional way of distribution and in some territories also the only possible way of distribution; it is a satisfactory form of sale from a cash flow point of view, because the conditions of payment are 0-30 days. Another advantage, as far as magazines are concerned is, in comparison 43 with the National Newsstand Networks, the Company does not get any returns with this kind of distribution. As for CD-Roms, this is the best system to ensure the highest possible end-user price. Disadvantages As far as magazines and videos are concerned, this method gives the Company less control on the distribution within the territories, resulting in overflow into other territories; it also gives it a low margin per copy, in comparison with the National Newsstand Networks. In the case of CD-Roms, since it is very expensive for the wholesalers to finance his stock, it is important for the Company to keep a good inventory for timely deliveries on short notice. c. Licensees The sale of magazines to Licensees, is based on an agreed allocation of the cover price, after the distributors' variable costs, such as printing and color separations. Videos are sold to Licensees on an agreed allocation after the distributors industrial costs. Advantages For magazines, this is a very cost effective way of distributing, as the distributors take all the costs for printing, etc. and the Company only collects the royalties, generally producing good cash flow. Logistics are very simple and uncomplicated. As far as videos are concerned, Licensees know their market very well as they have their own sales force that efficiently work up all the shops in the territory and in this way maximise the sales. This is also in many cases the only way to reach the video rental stores. As for CD-Roms, having a licensor (i.e. territorial distributor) who acts as a wholesaler for CD-Rom products with a stock on consignment is financially smart. The financial burden of the stock is moved from the wholesaler to the Company, where the actual invested money into the products are substantially less than to the wholesaler. In some cases the wholesaler is charged half or full duplication costs to minimize the Company's cash exposure. This enables the wholesaler to always keep plenty of products in stock to service his customers who order very frequently and need delivery within one or two days. Disadvantages As far as magazines are concerned, a negative effect of this method is that the Company has less control over the printing when it comes to volumes and quality, as this is controlled by the distributors themselves; it gives the Company the lowest margin of all the different distribution methods. In regards to videos, this method is more labor intensive, and it takes longer for the distributors to pay. In regards to CD-Roms, allowing the licensor to keep products on consignment means that the Company has to have a good financial trust in each Licensor to guarantee at least the duplication and transportation costs, against any licensees default. d. Wholesalers of Back Catalogue Advantages With this distribution method, the Company has the possibility to sell all the returned products received from the distributors in the National Newsstand Networks. As the Company can use a different price policy on the Back 44 Catalogue, it is able to sell the magazines at a lower price, enabling the marketing division to operate in territories with a lesser economy, i.e opening new markets. Disadvantages As many of these distributors can often be found in developing and unstructured countries, they can be labor intensive to work with; these distributors seldom pay on time. e. Internet Advantages This way of distributing increases the total sales points in every area as a result of the customer accessing the products easier. It creates an in- house customer base, and gives the Company a high margin per copy. This is the ultimate way of distributing videos. Apart from sales of the products via mail order, there is an opportunity to sell parts of the videos for the customers demand, i.e. pay-per-view. The customer gets an option to preview samples of the videos, and then purchase the actual video. As far as CD- Roms are concerned, this a fast growing market, as well as for other traditional Private products (videos, magazines, novelties), because consumers with Internet are very likely to have CD-Rom capabilities. Disadvantages The Internet distribution provides a great tool of marketing cross borders. However, it is important to take advantage of the current infrastructure in terms of culture, language, package and handling issues. f. Mail Order Advantages For magazines and videos, this distribution channel gives the Company the possibility to get extra sales in forms of Back Catalogue products on a Firm Sale basis (See: Wholesalers of magazines). Buyers often order high volumes and are well established companies; logistics are simple as the products have already been produced and prepared before. As far as videos are concerned, the requests for compilation tapes put together from old material, such as The Best of Private, are one way of creating extra sales at very low cost. Disadvantages The Company doesn't get a very high average price per copy for magazines and videos. 45 Piracy Problems According to figures from the Motion Picture Association of America, annual losses from video piracy are an estimated $250 million in the U.S. alone, and close to $2.5 billion worldwide; adult video represents approximately 14% of the video business. The biggest piracy problem concerns the business done on markets where pornography is illegal or in countries with a poor economic situation. This is the situation mainly in the eastern states of Europe, such as Russia, Poland, Rumania, etc. Many of these eastern markets are so destroyed with piracy that it is more or less impossible to distribute the Company's products there. The piracy causes such a disturbed price structure that it does not leave any margins for the Company to sell its products in these territories. It is also very difficult to claim rights with reference to the copyright laws. This is a problem for everyone doing business with these markets. Another upcoming piracy problem that the Company will have to face regularly concerns the Internet. The question is how to confirm that all the different mail order sites selling Private products actually sell the original products, and not pirated copies. The problem lies in the distribution procedures, which in the case of Internet, is straight from the Internet provider's order page to the end consumer. Another problem connected with the Internet is fast advancing video streaming where the possibilities to control the origin of what is shown are almost none. Very unfortunately, when it comes to the piracy problems in the Eastern States of Europe there is not much that can be done, except for acceptance of the situation. Also in regards to mail order, it is very difficult to control what is actually happening. Most of these piracy situations are handled by the Company's legal counsel who attempt to resolve them or litigate, on a case-by- case basis. When it comes to the Internet, one solution could be the appointment of so called "Web Police", one for each territory. Web Police standard practices are to order cassettes for free, with the intent to return them later to the different abusive sites and, in that way controlling what is actually being sold on a specific market. In July 1998 the Company launched a new program which it hopes will reduce piracy. The program allows any person to sell the Company's products online on the Internet through a "Private Online Shop." By agreeing to link the independent representative's website to the Company's homepage, the independent representative will be allowed to offer Private products for sale directly to its customers. In turn, the independent representative is in turn required to purchase merchandise directly from the national distributor. This marketing arrangement is expected to allow the Company to increase its points of sale throughout the world for a very low cost. PROPRIETARY RIGHTS The Company believes that it has developed strong brand awareness within each of its magazines' and videos' targeted markets. As a result, the Company regards its branded magazine titles and logos to be valuable assets and believes that its trademarks are vital to the success and future growth of all of the Company's businesses. The Company has filed trademark registration applications with respect to most of its trade names and logos. The Company believes that the name recognition and image that it has developed in each of its markets significantly enhance customer response to its sales promotions. Accordingly, trademarks and copyrights are important to the Company's business and the Company intends to aggressively defend them throughout the world 46 as it constantly monitors the marketplace for counterfeit products. Consequently, it initiates legal proceedings from time to time to prevent unauthorized use of the trademarks. The following table describes the registration of the Private brand wordwide. Other brands such as Pirate, Triple X, etc. have been registered in the same countries, and registrations are constantly updated by the Company. TRADEMARK APPLICAT. NO. APPLICAT. DATE COUNTRY PRIV. Fig. 2.020.599 2/8/96 ARGENTINA PRIV. Fig. 671'997 9/11/95 AUSTRALIA PRIV. + Fig. AM/1428/74 6/12/74 AUSTRIA PRIV. Fig. 855'162 9/6/95 BENELUX PRIV. Fig - 2/26/96 BOLIVIA Priv.Int.logo 816'717'699 5/6/92 BRAZIL PRIV. Fig. 794.759 10/13/95 CANADA PRIV. Fig. 96.009.460 2/28/96 COLOMBIA PRIV. + Fig. 381-04/93-01/1179 3/18/93 CROATIA PRIV. Fig. VA 00.631 1196 1/30/96 DENMARK PRIV. Fig. 93-1879 3/11/93 ESTONIA PRIV. + Fig. 2485/74 5/27/74 FINLAND PRIV. Fig. 95/588840 9/20/95 FRANCE PRIV. Coll.logo P41976/25 Wz 10/23/91 GERMANY PRIV. 69'753 9/2/81 GREECE PRIV. Fig 632/90 2/12/90 HUNGARY PRIV. MI97C 003738 4/23/97 ITALY PRIV. Fig. M-93-2257 3/10/93 LATVIA PRIV. Fig. RL 5597 3/16/93 LITHUANIA PRIV. Fig. 251928 1/12/96 MEXICO PRIV. + Fig. 118'918 5/24/74 NORWAY PRIV. + Fig. Z-90189 3/27/90 POLAND PRIV. Fig. 313116 10/19/95 PORTUGAL PRIV. Fig. 119927 3/16/90 RUSSIA PRIV. + Fig. Z 90 8 0327 3/24/93 SLOVENIA PRIV. Fig. 94/9946 9/14/94 SOUTH AFRICA PRIV. 1'064'998 3/27/84 SPAIN PRIV. Fig. 90-1884 2/26/90 SWEDEN PRIV. Fig. 4816/1994.3 7/15/94 SWITZERLAND PRIV. Coll.logo 1'479'749 10/17/91 UK PRIV. 462'280 6/18/73 USA PRIV. Fig. 327/90 3/7/90 YUGOSLAVIA LEASES During 1997, the Company relocated its principal administrative and operating offices from Stockholm, Sweden to Barcelona, Spain. The Barcelona facility houses the Company's administrative, editorial and operational offices, the data center, customer service, and some of the warehouse and fulfillment facilities. With the acquisition 47 of the French distributor at the end of 1997, the Company also inherited some office space in Paris, France. Currently, the Company leases office space in Stockholm, Barcelona and Paris. Since May 27, 1997, Milcap Media Group S.L. is lessee under an initial 5- year lease representing its operating corporate office. The lease is effective from the May 27, 1997 (2d floor), November 1st, 1997 (1st floor) and October 3rd, 1997 (roof-surface for Internet satellite antennas) and represents approximately 1,300 square meters of corporate headquarters space located at Carrettera de Rubi 22-26, 08190 San Cugat del Valles, Barcelona, Spain. Average monthly base rental expense is approximately $9,400. The rent expense is being charged to operations on a straight-line basis over the extended term of the lease. Additionally, the lease requires the Company to pay its proportionate share of the building's real estate taxes and operating expenses. The majority of this space is used by all of the Company's operating groups, primarily for post production. Since February 5, 1993, the Milcap Media Group S.L. leases space for its warehousing facilities and mail order operations at the following location: Calle Vallespir, 13, Sant Joan Despi, Barcelona, Spain. The average monthly base rental expense is approximately $2,460. Private France S.A. is lessee under an expired term lease, which is now currently month-to-month, for approximately 50 square meters of corporate headquarters space located at 17, rue Charles de Gaulle - 78680 Epone, France. Subsequent to the term of the lease, the average monthly base rental expense is approximately $1,067. The rent expense is being charged to operations, on a monthly basis. Private France S.A. also leases space for its warehousing facilities at RD S.L., B.P 2 - 28410 Saint-Lubin-de-la-Haye, at a price of $41 per pallet per month (the quantity of pallets varies from month to month). Milcap Publishing Group A.B. maintains its headquarters in Ryssviksvagen 2A 7tr, 131 36 Nacka, Sweden and consists of approximately 3,226 square feet of office space and approximately 1,755 square feet of warehouse space. The lease expires on December 31, 2000 and has an average annual base rental expense of approximately $34,937; it is subject to periodic increases to reflect rising real estate taxes and operating expenses. This space is utilized by the Swedish executive and administrative personnel. Private Media Group, Inc.'s principal offices are located at 3230 Flamingo Road, Suite 156, Las Vegas, Nevada 89121. For the time being, no office space is rented and the above address is simply a mailing address. Additionally, a limited amount of space is utilized occasionally by the executive personnel at the Chairman's business address located at Corso Elvezia 4, CH-6900 Lugano, Switzerland. LEGAL PROCEEDINGS The Company is from time to time a defendant in suits for defamation and violation of rights of privacy, many of which allege substantial or unspecified damages, which are vigorously defended by the Company. The Company is presently engaged in other litigation, most of which is generally incidental to the normal conduct of its business and is immaterial in amount. Management believes that its reserves are adequate and that no such action will have a material adverse impact on the Company's financial condition. However, there can be no assurance that the Company's ultimate liability will not exceed its reserves. 48 COMPETITION General Considerations Nearly all of the Company's products compete with other products and services that utilize leisure time or disposable income. The businesses in which the Company competes are in general, highly competitive and service-oriented. The Company has few long-term or exclusive service agreements with its customers. Business generation is based primarily on customer satisfaction with reliability, timeliness, quality and price. The Company believes that the extensive and longstanding international operations, its name, its image and reputation, as well as the quality of its distributors, provide a significant competitive advantage over many other competitors seeking to establish a similar business. Although its magazines and videos are well established and high quality products in the adult industry, the Company is in competition with entities selling similar products at retail as well as by direct marketing, regardless of whether the products being offered are similar to the Company's products. Magazines The Company meets with minimal direct competition from other publishers of adult magazines and paperback books as well as all other forms of print media adult entertainment. The Company's publications are in general unique in their style and format and it is almost impossible to name any major competitor in this field. As far as magazines are concerned, the only similar business is represented by Rodox N.V. a Dutch/Danish corporation printing approximately 20,000 copies of monthly hardcore magazines. Magazines such as Playboy, Penthouse, Hustler or similar adult publications do not compete with the Company's publication, since they are considered to be softcore publications. There are several hardcore publications in each country where the Company's magazines are sold, but in general, they are printed in limited edition and lower quality than the Company's publications and therefore the Company is not fearing at present any major competition on this end of its business. As far as the U.S. market is concerned, none of the competitors publishes or distributes more than 5,000 copies per month, while Private USA, Inc. currently exceeds 15,000 sold copies of each magazine per month. In addition, none of these competitors normally own any pictorials. Video The production and distribution of video and cable television products are highly competitive, as each competes with the other as well as with other forms of entertainment. Furthermore, there is increased competition in the television industry evidenced by the increasing number and variety of basic cable, satellite and pay television services now available. Revenues for motion picture entertainment product depends in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace. There is strong competition throughout the adult video industry, both from adult video producers and from independent companies distributing amateurish material. 49 The Company's primary competitors in the video industry area are adult motion picture studios, with in-house production and post production capabilities. Other competitors are smaller, but locally or domestically, they are capable of quickly identifying niche markets that could compete for the Company's customers. In addition, the Company also competes with other forms of media, including broadcast and cable television, direct marketing, electronic media and adult Web sites. Management believes that none of its competitors have larger worldwide distribution or have greater financial resources than the Company. The closest competitors are U.S. producers such as VCA Pictures or Vivid Film; smaller competitors are Wicked Pictures, Evil Angel Productions or Metro Global Media Inc., but all these competitors have a distribution in the U.S. market, while they are relatively less represented worldwide. 50
Adult Video Producers / Competitors USA d/b/a VCA Pictures Platinum Plus, HIS Video Vivid Film Wicked Pictures Evil Angel Productions Elegant Angel Productions Arch Angel Video Metro Home Video Cal Vista Video, Amazing Pictures, Intropics Video Other Minor Competitors Nitro Productions LLC, In X-Cess Productions, 4-Play Video Odyssey Group Video, Coast To Coast Video Klimaxxx Productions, Leisure Time Entertainment Fat Dog Productions, Caballero Video EUROPE VMD Video Marc Dorcel Power Vision Mario Salieri, Nicky Ranieri Productions, Mille Video Productions Showtime Communications Silvio Bandinelli Other Minor Competitors: Colmax , Preziosa, Euro-Sex, Max Bellocchio Production Helen Duval, Century, Rocco Siffredi Productions
CD-Rom and Interactive Games There are several competitors that have already released adult CD-Rom titles and interactive games, many of whom have significantly greater technical and marketing resources than those of the Company's licensees. Management believes that new competitors are increasing their focus on the consumer software market, which will result in greater competition for this kind of product. Management is not concerned by this situation because it believes that this area of the Company's activity will never represent a significant percentage of its overall business. Internet As indicated above, the Internet market for adult oriented content is booming and the number of adult sites competing with the Company's is in excess of 20,000 http addresses, most of which are free sites and currently some of them can claim a higher daily traffic than the Company's site. Management believes that traffic on its web site will change dramatically as soon as the new private.live and private.cinema sections will be available to the public. Among other things, the Company is planning to achieve growth through acquisitions of existing business enterprises. The structure of the adult entertainment industry is such that there are just a few large corporations and none of them have an international presence as the Company does. In addition, only a few of these corporations are 51 publicly traded and among these few, the Company believes that none currently have the financial capability and the market liquidity necessary to attract other businesses under merger or acquisition agreements. Management believes that because its Common Stock is publicly traded and the Company's international presence, it will be in a position to acquire many of the hundreds of privately owned adult entertainment businesses, which typically have limited financing and personnel, and who often, as a result of limited capital resources, have no other alternative but to continue their business as it is. Management believes that, as a public company, it will be able to attract privately held acquisition candidates at a much lower price/earning multiple than that of the Company. The Company does not plan to limit potential acquisitions to any particular industry. Accordingly, there can be no assurance that the Company can integrate such businesses into its operations or that it can operate such businesses on a profitable basis in the future. In addition, there can be no assurance that future acquisition opportunities will become available, that such future acquisitions can be accomplished on favorable terms, or that such acquisitions will result in profitable operations in the future. In addition, many of the Company's acquisitions are structured as stock exchanges. Fluctuations in the Common Stock may have an adverse effect on the Company's ability to make additional acquisitions. Currently, the Company is starting a process of vertical integration and plans to take control of some of the territories in which it has granted licensing agreements. Presently, only the French speaking territories operate as a Company's subsidiary. Initial target markets are Scandinavia, the United States and South America. On May 5, 1998, in furtherance of the vertical integration strategy, the Company entered into a Letter of Intent with Max's Film AB, Stockholm, Sweden, which among other things, is also acting as the Company's distributor for Scandinavia. The Letter of Intent provides for a stock acquisition of all of the assets, library, trademarks and other rights to the intellectual property used by Max's Film AB in its activities. The proposed definitive agreement to be executed between the Company and Max's is expected to contain a purchase price of up to $2.6 million, payable as follows: $1,300,000 in value of Common Stock of the Company at closing in exchange for 100 percent of the outstanding shares of Max's, up to an additional $650,000 in value of Common Stock of the Company to be paid within one year of the acquisition based upon earnings, and up to an additional $650,000 in value of Common Stock to be paid based upon earnings during the second year after the acquisition. Max's shareholders will also receive 50,000 three years Common Stock Warrants. The Common Stock price and the exercise price of the Warrants will be the average closing price for the 20 business days prior to the Closing. In the near future, the Company expects to enter into similar agreements with other distributors or direct competitors. EMPLOYEES As of August 10, 1998, the Company (including its subsidiaries) employed 56 persons on a full-time basis. The Company also had eight independent contractors under contract at such time. The Company's full-time editorial and post-production staff consists of an editor-in-chief, six executive editors and approximately seven editors, associate editors and assistant editors who oversee the quality and 52 consistency of the artwork and editorial copy and manage the production schedule of each issue. The production of each issue requires the editors to coordinate over a two month period the activities of a writer, a pencil artist, an inker, a colorist and a printer. The majority of this work is performed inside of the Company's premises. As of February 28, 1998, Milcap Publishing Group AB employed five persons on a full-time basis, one of whom were Officers or other Executives. The Company also had two independent contractors under contract. The photographers and producers consist of freelancers who generally are paid on a per-assignment basis. The Company has entered into agreements with certain photographers or movie directors and writers under which such persons have agreed to provide their services to the Company on an exclusive basis, generally for a period of one to three years. Pierre Woodman is the main movie producer currently under such exclusivity agreement. The Company believes that it has good relationships with its employees. Currently, none of the Company's employees are represented by any labor union. GOVERNMENT REGULATION The Classification and Rating Administration of the Motion Picture Association of America (MPAA), a motion picture industry trade association, assigns ratings for age group suitability for theatrical and home video distribution of motion pictures. Submission of a motion picture to the MPAA for rating is voluntary, and the Company does not submit its motion pictures to the MPAA for review. However, with the exception of several titles which have been re-edited for cable television, most of the films and videos distributed by the Company, if so rated, would most likely fall into the "NC-17 - No Children Under 17 Admitted" rating category because of depiction of nudity and their sexually explicit content. The right to distribute adult videocassettes, magazines and CD-Rom products is protected by the First and Fourteenth Amendments to the United States Constitution, which prohibit Congress or the various States from passing any law abridging the freedom of speech. The First and Fourteenth Amendments, however, do not protect the dissemination of obscene material, and several States and communities in which the Company's products are distributed, have enacted laws regulating the distribution of obscene material with some offenses designed as misdemeanors and others as felonies, depending on numerous factors. The consequences for violating the State statutes are as varied as the number of States enacting them. Similarly, 18 U.S.C. Sections 1460-1469 contain the Federal prohibitions with respect to the dissemination of obscene material, and the potential penalties for individuals (including Directors, Officers and Employees) violating the Federal obscenity laws include fines, community service, probation, forfeiture of assets and incarceration. The range of possible sentences require calculations under the Federal Sentencing Guidelines, and the amount of the fine and the length of the period of the incarceration under those guidelines are calculated based upon the retail value of the unprotected materials. Also taken into account in determining the amount of the fine, length of incarceration or other possible penalty are whether the person accepts responsibility for his or her actions, whether the person was a minimal or minor participant in the criminal activity, whether the person was an organizer, leader, manager or supervisor, whether multiple counts were involved, whether the person provided substantial assistance to the government, and whether the person has a prior criminal history. In addition Federal law provides for the forfeiture of: (1) any obscene material produced, transported, mailed, shipped or received in violation of the obscenity laws; (2) any property, real or personal, constituting or traceable to gross profits or other proceeds obtained from such offense; and (3) any property, real or personal, used or intended to be used to commit 53 or to promote the commission of such offense, if the court in its discretion so determines, taking into consideration the nature, scope and proportionality of the use of the property in the offense. With respect to the realm of potential penalties facing an organization such as the Company, the forfeiture provisions detailed above apply to corporate assets falling under the statute. In addition, a fine may be imposed, the amount of which is tied to the pecuniary gain to the organization from the offense or determined by a fine table tied to the severity of the offense. Also factored into determining the amount of the fine are the number of individuals in the organization and whether an individual with substantial authority participated in, condoned, or was willfully ignorant of the offense; whether the organization had an effective program to prevent and detect violations of the law; and whether the organization cooperated in the investigation and accepted responsibility for its criminal conduct. In addition, the organization may be subject to a term of probation of up to five years. Federal and State obscenity laws define the legality or illegality of materials by reference to the United States Supreme Court's three-prong test set forth in Miller v. California, 413 U.S 1593 (1973). This test is used to evaluate whether materials are obscene and therefore subject to regulation. Miller provides that the following must be considered: (a) whether "the average person, applying contemporary community standards" would find that the work, taken as a whole, appeals to the prurient interest; (b) whether the work depicts or describes, in a patently offensive way, sexual conduct specifically defined by the applicable State law; and (c) whether the work, taken as a whole, lacks serious literary, artistic, political or scientific value. The Supreme Court has clarified the Miller test in recent years advising that the prurient interest prong and patent offensiveness prong must be measured against the standards of "an average person, applying contemporary community standards," while the value prong of the test is to be judged according to a reasonable person standard. The Company is not directly engaged in the wholesale distribution of its products to U.S. wholesalers and/or retailers. The Company believes that owners of Private USA, Inc., its U.S. distributor, has taken steps to ensure compliance with all Federal, State and local regulations regulating the content of its motion pictures and print products, by staying abreast of all legal developments in the areas in which its motion pictures and print products are distributed and by specifically avoiding distribution of its motion pictures and print products in areas where the local standards clearly or potentially prohibit these products. In addition, Private USA, Inc. often requires that all video material be reviewed by an independent advisory panel comprised of two psychologists, a certified sex therapist, licensed marriage and family therapist, a certified sex educator and a licensed independent clinical social worker. Their review is directed to aspects of serious scientific value as set forth in the Miller test, because that aspect of the test is not limited by community standards but is concerned with whether a reasonable person would find such value in the material, taken as a whole. In light of Private USA's efforts to review, regulate and restrict the distribution of its materials, Management believes that the distribution of the Company's products does not violate any statutes or regulations. Many of the communities in the areas in which Private USA, Inc. offers or intends to offer products or franchises, have enacted zoning ordinances restricting the retail sale of adult entertainment products. Management believes that Private USA, Inc. intends to supply products only in locations where the retail sale of adult entertainment products is permitted. In February 1996, U.S. Congress passed the Telecommunications Act (the "Act"), and President Clinton signed it into law. Certain provisions of the Act are directed exclusively at cable programming in general and adult cable programming in particular. In some cable systems, audio or momentary bits of video of premium or pay-per-view channels may accidentally become available to nonsubscribing cable customers. This is called "bleeding." The 54 practical effect of Section 505 of the Act ("Section 505") is to require many existing cable systems to employ additional blocking technology in every household in every cable system that offers adult programming, whether or not customers request it or need it, to prevent any possibility of bleeding, or to restrict the period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the Act are significant and include fines and imprisonment. Surveying of cable operators and initial results indicate that most will choose to comply with Section 505 by restricting the hours of transmission. Management believes that the Company's revenues will be marginally materially adversely affected as a result of enforcement of Section 505. In addition, as digital technology (which is unaffected by Section 505) becomes more available, the Company believes that ultimately the impact will be insignificant. The National Defense Authorization Act of 1997 was signed into law in September 1996. One section of that legislation that began as the Military Honor and Decency Act (the "Military Act") bans the sale or rental of sexually oriented written or videotaped material on property under the jurisdiction of the Department of Defense. A Federal Court has permanently enjoined enforcement of the Military Act and has prohibited the Department of Defense from changing its acquisition and stocking practices based on the Military Act. The government has filed an appeal and a decision by the Appellate Court is pending. The Military Act, if applicable to the Company's products and enforceable, would prohibit the sale of the Company's magazines and videos at commissaries, PX's and ship stores, and would adversely affect a portion of the Company's sales attributable to such products. Based on preliminary estimates and current sales levels at such locations, the Company believes that any such impact would be immaterial. As discussed above, U.S. Federal and State government officials have targeted "sin industries," such as tobacco, alcohol, and adult entertainment for special tax treatment and legislation. In 1996, US Congress passed the Communications Decency Act of 1996 (the "CDA"). Recently, the US Supreme Court, in ACLU v. Reno, held certain substantive provisions of the CDA unconstitutional. Businesses in the adult entertainment and programming industries expended millions of dollars in legal and other fees in overturning the CDA. Investors should understand that the adult entertainment industry may continue to be a target for legislation. In the event the Company must defend itself and/or join with other companies in the adult programming business to protect its rights, the Company may incur significant expenses that could have a material adverse effect on the Company's business and operating results. Child Pornography The content of every single adult tape on the shelves of every video and adult store in the U.S. involves consenting adults. Roughly 90 percent of the material produced and distributed over the past 15 years contains mainstream sexual acts between consenting adults. The rest could be classified as specialty material which does not contain explicit sex, but which still involves consenting adults (i.e. fetish, bondage, etc.). Mainstream sex acts means intercourse, oral sex, anal sex, group sex, etc. Adult movies do not contain any depictions, let alone actual performances of rape, sex with coercion, animals, urination, defecation, violence, incest or child pornography. Since 1990, the Free Speach Coalition has worked with the Federal government to create a workable regulatory system designated to prevent minors from working in the adult industry. Child Protection Restoration and Penalties Enhancement Act of 1990 (18 U.S.C. section 2257) requires, in essence, that no one can work without having copies of their passport or driver's license, and a declaration under perjury of their age and true name, on file with the Company's Custodian of Records, and available for inspection by law enforcement. Mrs. Gloria Leonard, an Officer of Private USA, Inc. is currently the President of the Free Speach Coalition. 55 Child Pornography Prevention Act of 1996 goes beyond what was defined in existing law. The new law is directed for the most part at depictions where no minors are involved at all, with a few exceptions such as situations where a photo of a minor and a photo of an adult are merged by computer to create a photo of a minor engaging in sexual activities where the minor never actually did so ("appear to be" or "convey the impression" approach). This law is currently still not approved by the government and seems to be extremely questionable when it comes to enforcement and control. As indicated above, all the Company's products are all in compliance with 18 USC Section 2257 and all models performing in Company's productions are 18 of age or older. Seasonality The Company's businesses are generally not seasonal in nature. However, June, July and August are typically impacted by smaller orders from some European and the U.S. distributors, due to the holiday season, while November and December sales are generally higher due to the printing of special issues such as The Best of Private. 56 MANAGEMENT The names of the directors, executive officers and key employees of the Company and their respective ages and positions are as follows: Position With the ----------------- Name Age Company or Subsidiary ---- --- --------------------- Alfredo M. Villa.......... 37 Chief Executive Officer, President and Director Berth H. Milton........... 43 Director, Secretary, Private Media Group, Inc.; Administrator of MMG Bo Rodebrant.............. 45 Director Claes Henrik Marten Kull.. 33 Chief Marketing Officer, Private Media Group, Inc.; Marketing Manager, MMG Javier Sanchez............ 36 Chief Operating Officer, Private Media Group, Inc.; General Manager, MMG Johan Gillborg............ 36 Chief Financial Officer, Private Media Group, Inc.; Chairman and Managing Director of Milcap Publishing Group AB Jean-Pierre Michel........ 45 Managing Director of Private France S.A. Directors and Executive Officers The following table sets forth certain information with respect to the persons who are members of the Board of Directors, executive officers or key employees of the Company: Alfredo M. Villa has been the President, Director and CEO of the Company since 1997, prior to the acquisition of the Milcap Group. Mr. Villa, holds a masters degree in economics from the University of Geneva, Switzerland and attended Bocconi University in Milan, Italy. He has over 13 years of experience with the Swiss banking industry. Mr. Villa is currently Chairman and CEO of SCF Societa di Consulenza Finanziaria S.A., a Swiss corporation specializing in asset management, mergers, acquisitions, and investment banking, where he has served since 1994. Prior to that Mr. Villa was an asset manager with several other European financial institutions. In addition, Mr. Villa was Chairman of the Board of Alma Grafiche Srl, of Milan, Italy, a leader in the high quality printing of books and magazines from 1995 until February 1998. Berth H. Milton was appointed to the Board of Directors in February 1998 in conjunction with the beginning of the final phase of due diligence process related to the acquisition of the Milcap Group by the Company in June 1998, and was appointed Corporate Secretary in June 1998. Mr. Milton is one of the most well known and reputable figures in the industry, has been Administrator of MMG since its inception and has been acting as an advisor to the Milcap Group since 1991. Mr. Milton is also active in several international industry and real estate projects and developments. 57 Bo Rodebrant was appointed as a Director of the Company in August 1998. Mr. Rodebrant has operated his own accountancy and management consulting services, R&S Ekonomiservice, since 1986. Prior thereto he co-founded an ice cream business, Hemglass, which was the largest of its kind in Stockholm, Sweden. The business was sold by Mr. Rodebrant in 1986. Mr. Rodebrant holds a degree in construction engineering which he received in 1974. Claes Henrik Marten Kull joined the Milcap Group in 1992 as a sales manager and has been Milcap Group's Marketing Manager since 1993, and was appointed Chief Marketing Officer of Private Media Group, Inc. in August 1998, with his main responsibilities being to identify and open up new markets and negotiate with distributors. Since he begun working for the Milcap Group in 1992, approximately 25 new countries have been opened up. From 1991 to 1992 he operated his own business (his business partner was Johan Gillborg) which acted as a sub-contracted sales force for Securitas Direct of Sweden, which is one of Sweden's largest companies. From 1988 to 1991 he managed a private import and trading corporation, which became the start of his career as an entrepreneur and sales professional. Javier Sanchez was appointed as the Chief Operating Officer of Private Media Group, Inc. in August 1998, and has been the General Manager of MMG, member of the Board of MMG and Private France S.A., and minority shareholder of Milcap Media Group S.L. since its incorporation in 1991. He has been a member of the Board of Milcap Publishing Group AB since its incorporation in 1994 until 1997. From 1988 to 1991 he was the Operations Director of a mid-size printing company near Barcelona. From 1984 to 1987 he was the Production Manager of a major printing company in Barcelona. Johan Gillborg was appointed as Chief Financial Officer of Private Media Group, Inc. in August 1998 and has been the Chairman and Managing Director of Milcap Publishing Group AB since 1994. Mr. Gillborg joined the group in 1992 as Marketing Consultant. From 1991 to 1992 he operated his own business which acted as sub-contracting sales force for Securitas Direct of Sweden (together with Mr. Kull). From 1988 to 1990, Mr. Gillborg served as General Manager in the hotel business in the United Kingdom and Portugal. Jean-Pierre Michel has been the Managing Director of Private France S.A. since 1994, when he started the distribution business which was purchased by MMG in 1997. Prior to joining the Milcap Group, Mr. Michel was the COO of Polygram France and was mainly active in the marketing division. Prior thereto he was active in the video and magazine industry and was sales manager for Antares, Sevres, France and Echo S.A., Boulogne, France. No director or executive officer serves pursuant to any arrangement or understanding between him or her and any other person. 58 Committees of the Board of Directors The Board of Directors currently has three committees: (i) an Audit Committee and (ii) a Compensation Committee and (iii) an Executive Committee. The Audit Committee is currently comprised of Messrs. Villa, Gillborg and Sanchez. The Audit Committee reviews and recommends to the Board, as it deems necessary, the internal accounting and financial controls for the Company and the accounting principles and auditing practices and procedures to be employed in preparation and review of financial statements of the Company. The Audit Committee makes recommendations to the Board concerning the engagement of independent public accountants and the scope of the audit to be undertaken by such accountants. The Compensation Committee is currently comprised of Messrs. Villa, Milton and Sanchez. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board policies, practices and procedures relating to the compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. It exercises all authority under any employee stock option plans of the Company as the Committee therein specified, unless the Board resolution appoints any other committee to exercise such authority, and advises and consults with the officers of the Company as may be requested regarding managerial personnel policies. The Compensation Committee also has such additional powers as may be conferred upon it from time to time by the Board. The Executive Committee is comprised of Messrs. Milton, Kull and Sanchez. The Executive Committee is authorized, subject to certain limitations, to exercise all of the powers of the Board of Directors during periods between Board meetings. Compensation of Directors None of the Company's Directors received any compensation during the most recent fiscal year for serving in their position as a director. No plans have been adopted to compensate Directors in the future. However, during fiscal 1998 the Board of Directors intends to adopt an employee Stock Option Plan which includes a provision for stock options to be issued to Directors. The Company's Board of Directors may in the future, at its discretion, compensate Directors for attending Board and Committee meetings and reimburse the Directors for out-of-pocket expenses incurred in connection with attending such meetings. 59 Executive Compensation The following table summarizes all compensation paid to the Company's Chief Executive Officer and to the Company's other most highly compensated executive officer other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers"), for services rendered in all capacities to the Company during the fiscal years ended December 31, 1997, 1996 and 1995. No other executive officer of the Company earned compensation in excess of $100,000 in each of these periods. Summary Compensation Table
Long Term Compensation ------------ Awards ---------- Annual Compensation Securities Name and Fiscal ------------------- Underlying All Other Principal Position Year Salary($) Options (#) Compensation($) ---- ------------------- ----------- --------------- Alfredo M. Villa............ 1997 29,073(1) --- --- Chief Executive Officer 1996 ___ and President 1995 ___ Berth H. Milton............. 1997 145,000 --- --- MMG Administrator, 1996 105,500 Corporate Secretary 1995 65,500
- ----------------------- (1) Represents $20,000 of fees and $9,073 of expenses paid under a Consulting Agreement between the Company and a company affiliated with Mr. Villa. No options to acquire shares of Common Stock of the Company were granted or exercised during the Company's fiscal year ended December 31, 1997. 60 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships No Director or executive officer of the Company is related to any other Director or executive officer. None of the Company's officers or Directors hold any directorships in any other public entity. There is currently one outside Director on the Company's Board of Directors and the Company intends to appoint at least one additional outside Director in August 1998. Related Transactions The Company has long term borrowings of SEK 1,132,000 and SEK 723,000 at December 31, 1996 and 1997, respectively. The borrowings bear interest at a rate of 10% payable annually and are due to entities controlled by Berth Milton. The borrowings have no maturity date. The Company's subsidiary MMG, Spain carries a prepayment of $442,000, related to the future acquisition of the shares of Viladalt S.L., Spain, which is the owner of the country house Casa Retol de la Sarra. The total purchase price is estimated to be $2.5 million and the ownership will be divided among MML, Cyprus (49%), Zebra Forvaltings AB, Sweden (31%), an affiliated company of Berth Milton, and MMG, Spain (20%). The foregoing transactions were not submitted for the approval of a majority of the Company's independent Directors who did not have an interest in the transactions and who had access, at the Company's expense, to the Company's or independent legal counsel. Rather, such transactions were approved by a majority of disinterested, but not independent, officers or Directors. Any ongoing or future transactions between the Company and its officers, Directors, principal stockholders, or other affiliates will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company's independent and disinterested Directors. Limitations on Liability and Indemnification of Officers and Directors The Restated Certificate of Incorporation limits the liability of Directors to the fullest extent permitted by the Nevada General Corporation Law. In addition, the Restated Certificate of Incorporation provides that the Company shall indemnify Directors and Officers of the Company to the fullest extent permitted by such law. The Company also anticipates entering into indemnification agreements with its current Directors and executive officers. Insofar as indemnification for liabilities under the Securities Act may be permitted to Directors, Officers, and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 61 PRINCIPAL STOCKHOLDERS The following table presents certain information as of June 30, 1998, regarding the beneficial ownership of Common Stock by (i) each of the directors and executive officers of the Company individually, (ii) all persons known by the Company to be beneficial owners of five percent or more of the Common Stock, and (iii) all directors and executive officers of the Company as a group. Unless otherwise noted, the persons listed below have sole voting and investment power and beneficial ownership with respect to such shares.
Number of Shares Name and Address (1) Beneficially Owned (1) Percent Beneficially Owned - -------------------- ---------------------- -------------------------- Berth H. Milton (2) La Vella, Andorra 7,175,000 47% Senate Limited 3 Bell Lane, Gibraltar 1,675,000 20.73% Chiss Limited 3 Bell Lane, Gibraltar 1,400,000 17.32% Bajari Properties Limited 7 Myrtle Street, Douglas, Isle of Man 625,000 7.73% Pressmore Licensing Limited P.O. Box N-341, Nassau, Bahamas 625,000 7.73% Perrystone Trading Limited P.O. Box 171, Providenciales, Turks & Caicos 625,000 7.73% Solidmark (Gibraltar) Ltd. 3 Bell Lane, Gibraltar 625,000 7.73% Churchbury Limited 3 Bell Lane, Gibraltar 625,000 7.73% Kingston Finance Ltd. Wickhams Cay, Road Town, Tortola, BVI 625,000 7.73% Alfredo M. Villa Lugano, Switzerland 15,000 * All Executive Officers and Directors as a group 7,190,000 47%
62 - ---------------------- * Denotes less than 1% (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and includes generally voting power and/or investment power with respect to securities. Shares of Common Stock which may be acquired upon exercise or conversion of warrants or Preferred Stock which are currently exercisable or exercisable within 60 days of June 30, 1998 are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Except as indicated by footnote, to the knowledge of the Company, the persons named in the table above have the sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Mr. Milton is indirectly the beneficial owner of the 7,000,000 $4 Series A Convertible Preferred Stock owned of record by Slingsby Enterprises Limited, which is convertible into 7,000,000 Common Stock and accrued interest. Also includes shares of Common Stock issuable upon exercise of 175,000 warrants to acquire Common Stock. 63 DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.001, of which 8,081,668 shares were outstanding as of June 30, 1998, and (ii) 10,000,000 shares of preferred stock, $.001 par value, of which 7,000,000 shares were issued and outstanding as of June 30, 1998. Common Stock Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders. The Articles of Incorporation do not limit cumulative voting rights. Accordingly all holders of common stock are entitled to cumulate their shares when voting for directors of the Company. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after payment of all debts and other liabilities and payment in full to holders of Preferred Stock then outstanding, if any, of any amount required to be paid under the terms of such Preferred Stock. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, validly issued, fully paid and non- assessable. Preferred Stock The Company's Articles of Incorporation, as amended, authorize the issuance of up to 10,000,000 Shares of Preferred Stock. The Board of Directors is authorized, without further Shareholder action, to issue such Shares in one or more series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, amounts payable upon liquidation and the number of Shares constituting any series or the designation of such series. If such Preferred Stock is issued, it will rank senior to the Company's Common Stock in respect of rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Company. The issuance of Preferred Stock may have the effect of delaying, deferring, discouraging or preventing a third party from acquiring a majority of the outstanding voting Stock of the Company or other change in control of the Company without further action by the stockholders, and may adversely affect the voting and other rights of the holders of the Common Stock, including the loss of voting control to others. The Board of Directors does not at present intend to seek Shareholder approval prior to issuing any such Preferred Stock, unless required to do so by law or applicable listing standards. Each share of the 7,000,000 newly designated Preferred Shares to be issued pursuant to the Milcap Acquisition Agreement has been designated as $4.00 Series A Convertible Preferred Stock, and provides for a 5% annual stock dividend to be paid quarterly in shares of Common Stock, valued at the average closing price of Common Stock for the 20 consecutive days prior to the quarterly record date, as reported by Nasdaq or NASD, Inc. OTC Bulletiin Board. Each Preferred Share is convertible at any time into Common Stock, on a one-for-one basis. However, if at any time the Common Stock of the Company has a closing price of less than $4.00 per share for 20 consecutive days, the Preferred Stock may be converted, at the option of the holder thereof, into Common Stock at a 20% discount to the five day average closing price, prior to the date of conversion. Slingsby Enterprises Limited, Dublin, Ireland currently owns 100% of the Company's 7,000,000 $4.00 Series A Convertible Preferred Stock. Slingsby Enterprises Limited is directly or indirectly controlled by Mr. Berth H. Milton, one of the Company's Directors. 64 Warrants The following is a brief summary of certain provisions of the Warrants, but such summary does not purport to be complete and is qualified in all respects by reference to the actual text of the Warrant Agreement between the Company and the warrant holder, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Company issued 175,000 new $4.00 Series Warrants pursuant to the terms of the Milcap Acquisition Agreement. These warrants are exercisable at any time until December 31, 2000, at an exercise price of $4.00 per share. The Company issued an additional 700,000 $4.00 Series Warrants pursuant to the Cinecraft Acquisition Agreement. These Warrants are exercisable at any time until December 31, 2000, at an exercise price of $4.00 per share. Each of the Company's outstanding warrants contain anti-dilutiion provisions that protect the warrant holders against dilution in certain events, including but not limited to stock dividends, stock splits, reclassification, or mergers. A warrant holder will not possess any rights as a stockholder of the Company. Shares of Common Stock, when issued upon the exercise of the warrants in accordance with the terms thereof, will be fully paid and non-assessable. The Company may amend the terms of the Warrants, but only by extending the termination date or lowering the exercise price thereof. The Company has no present intention of amending such terms. However, there can be no assurances that the Company will not alter its position in the future with respect to this matter. With regard to the 700,000 Warrants issued pursuant to the Cinecraft Acquisition Agreement, the Company has undertaken to use its best efforts to register the resale of the Common Stock issuable upon exercise of these Warrants. This Prospectus has been prepared in order to allow the holders of the 700,000 Warrants to resell the shares of Common Stock issued upon exercise of the Warrants without restriction. 65 Market For the Company's Common Stock The Common Stock of the Company is currently quoted on the OTC Bulletin Board under the symbol "PRVT." The following table sets forth the range of representative high and low closing prices for the Common Stock for the periods indicated. Quotations represent inter-dealer prices, do not include retail markups, markdowns or commissions and may not represent actual transactions.
High Low -------- ------- Fiscal 1998: First Quarter $ 11 1/2 $ 6 3/8 Second Quarter $ 12 3/4 $ 7 13/16 Fiscal 1997: First Quarter $ 31 7/8 $ 6 1/4 Second Quarter $ 41 9/16 $ 12 1/2 Third Quarter $ 23 3/4 $ 8 3/4 Fourth Quarter $ 11 7/8 $ 3 1/8 Fiscal 1996: First Quarter $ 1 1/4 $ 1 1/4 Second Quarter $ 1 7/8 $ 0 5/8 Third Quarter $ 1 7/8 $ 1 7/8 Fourth Quarter $ 8 3/4 $ 4.90
On August 17, 1998, the closing price of the Common Stock was $10.00 per share. On August 7, 1998 the Company had 281 holders of record of its Common Stock. Dividend Policy The Company did not pay any cash dividends during its last fiscal year and the Board of Directors does not contemplate doing so in the near future. The Company currently intends to retain all earnings, to finance the development and expansion of its operations, and does not anticipate paying cash dividends on its shares of Common Stock in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including results of operations, financial condition, business opportunities and capital requirements. The payment of dividends will also be subject to the requirements of Nevada Law, as well as restrictive financial covenants which may be required in future credit agreements. Transfer Agent The transfer agent and registrar for the Common Stock and Warrants is InterWest Transfer Co., Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117. 66 Listing of Common Stock on Nasdaq Stock Market The Common Stock of the Company is traded on the NASD, Inc. OTC Bulletin Board under the symbol "PRVT" and the Company has applied for listing of the Common Stock on the Nasdaq National Market. Listing on Nasdaq will occur only after all exchange requirements have been fulfilled. The Company anticipates meeting the listing requirements upon the commencement of the Offering. Even if the Company's Common Stock is accepted for quotation on the Nasdaq National Market, there can be no assurance that a public trading market will be maintained. 67 SHARES ELIGIBLE FOR FUTURE SALE As of the date of July 31, 1998, the Company had 8,081,668 Common Shares, and 7,000,000 Preferred Shares, outstanding. The Company will also have warrants issued and outstanding which, if exercised in full, would require the Company to issue an additional 875,000 Shares of its Common Stock, and subsequent conversion of all Warrants issued and outstanding would result in the Company having 8,956,668 Shares of its Common Stock issued and outstanding. The shares issued upon the Acquisition Agreements, i.e. the Common Stock issuable upon conversion of the 7,000,000 Preferred Shares, the 175,000 Shares underlying the Common Stock Warrants issued upon the Milcap Acquisition Agreement and 3,500,000 Common Stock issued upon the Cinecraft Acquisition Agreement which have not been registered and are not covered by this Prospectus, will initially be "restricted" from sale and public transfer. The shares of Common Stock which are "restricted securities" (as that term is defined in Rule 144 promulgated under the Securities Act) may be publicly sold only if registered under the Securities Act or if sold in accordance with an applicable exemption from registration, such as Rule 144. In general, In general, under Rule 144 as in effect commencing April 29, 1997, beginning 90 days after the date of this Prospectus, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted securities for at least one year, is entitled to sell (together with any person with whom such individual is required to aggregate sales) within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or, if the Common Stock is quoted on the Nasdaq Stock Market or another national securities exchange, the average weekly trading volume during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements, and the availability of current public information regarding the Company. A person who has not been an affiliate of the Company for at least three months, and who has beneficially owned restricted securities for at least two years, is entitled to sell such restricted shares under Rule 144(k) ("Rule 144(k) Shares") without regard to any of the limitations described above. In addition, Rule 144A as currently in effect, in general, permits unlimited resale's of certain restricted securities of any issuer provided that the purchaser is an institution that owns and invests on a discretionary basis at least $100 million in securities or is a registered broker-dealer that owns and invests $10 million in securities. Rule 144A allows the existing stockholders of the Company to sell their shares of Common Stock to such institutions and 68 registered broker-dealers without regard to any volume or other restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A to nonaffiliates do not lose their status as restricted securities. No prediction can be made as to the effect that future sales of Common Stock, or the availability of shares of Common Stock for future sale, will have on the market price of the Common Stock prevailing from time to time. 69 SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION All of the shares of Common Stock of the Company covered by this Prospectus are being sold for the account of the selling stockholders named in the table below under "Shares of Common Stock Offered by Selling Stockholders (the "Selling Stockholders"). The shares being offered by the Selling Stockholders consist of (i) an aggregate of 4,000,000 shares of Common Stock acquired by certain Selling Stockholders pursuant to the Cinecraft Acquisition Agreement, and (ii) an aggregate of 700,000 shares of Common Stock of the Company which may be acquired by certain Selling Stockholders upon the exercise of outstanding Warrants issued pursuant to the Cinecraft Acquisition Agreement. Although the Company will receive proceeds from the exercise of outstanding Warrants from time to time when and if they are exercised, the Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders offered hereby. For further information regarding the terms of the Warrants, see "Description of Securities." The shares of Common Stock offered by the Selling Stockholders may be offered for sale from time to time at market prices prevailing at the time of sale or at negotiated prices, and without payment of any underwriting discounts or commissions except for usual and customary selling commissions paid to brokers or dealers. This Prospectus has been prepared so that future sales of the shares of Common Stock by the Selling Stockholders will not be restricted other than as set forth herein. In connection with any sales, the Selling Stockholders and any brokers participating in such sales may be deemed to be "underwriters" within the meaning of the Securities Act. Pursuant to rules promulgated under the Exchange Act, a Selling Stockholder who is neither affiliated nor directly or indirectly acting in concert with the issuer or with any other Selling Stockholder will be required to observe the appropriate "cooling off" period and other restrictions only prior to the individual stockholder's distribution and until such distribution ends or the shares are withdrawn from registration. Conversely, a Selling Stockholder who is affiliated or acting in concert with the issuer or another Selling Stockholder will be required to observe the appropriate "cooling off" period and other restrictions under Regulation M under the Exchange Act with respect to all offers and sales by affiliated persons. Except as described above or in the footnotes to the Selling Stockholder Table below, no Selling Stockholder has had any material relationship with the Company or an affiliate of the Company, including its predecessors, within the past three years. The shares of Common Stock sold for the account of the Selling Stockholders may be sold in one or more of the following transactions: (a) block trades in which the broker or dealer so engaged will attempt to sell such shares as agent but may position and resell a portion of the block as principal to facilitate any transaction, (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus, and (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers. In effecting sales, brokers and dealers engaged by Selling Stockholders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from Selling Stockholders in amounts to be negotiated (and, if such broker-dealer acts as agent for the purchaser of such shares, from such purchaser). Broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share, and, to the extent such a broker-dealer is unable to do so acting as agent for a Selling Stockholder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment to such Selling Stockholder. Broker-dealers who acquire such shares as principals may thereafter resell such shares from time to time in transactions (which may involve crosses and book transactions and which may involve sales to and through other broker-dealers, including transaction, of the nature described above) in the over-the-counter market, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated transactions or otherwise, at market prices prevailing at 70 the time of sale or at negotiated prices, and in connection with such resales may pay to or receive from the purchasers of such shares commissions as described above. Listed below are the names of each selling stockholder (the "Selling Stockholders"), the total number of shares owned and the number of shares to be sold in this offering by each Selling Stockholder, and the percentage of Common Stock owned by each Selling Stockholder after this Offering:
Number of Shares of Common Shares of Shares of Stock to Common Stock Common Stock be Offered for Owned Owned Selling After Prior to Stockholder's Completion of Name Offering(1) Account(1) Offering - ---- ----------- --------------- ----------- Number Percent ------ ------- Bajari Properties Limited 625,000 625,000 - - Pressmore Licensing Limited 625,000 625,000 - - Perrystone Trading Limited 625,000 625,000 - - Solidmark (Gibraltar) Ltd. 625,000 625,000 - - Churchbury Limited 625,000 625,000 - - Kingston Finance Ltd. 625,000 625,000 - - Givigest Fiduciaria SA (2) 25,000 25,000 - - Strategic Investors Ltd. 125,000 125,000 - - Prestige Underwriters N.V.(1) 350,000 350,000 - - OTC Opportunities Corp.(1) 350,000 350,000 - - Stockbond Ltd. 100,000 100,000 - - - ----------------
(1) Assumes the exercise of all 700,000 Warrants acquired by two Selling Stockholders, Prestige Underwriters N.V. and OTC Opportunities Corp., pursuant to the Cinecraft acquisition in June 1998. (2) Alfredo M. Villa, President and Director of the Company, was a stockholder and officer of Givigest Fiduciaria SA until December 1996. 71 LEGAL MATTERS The validity of the Shares of Common Stock offered hereby will be passed upon for the Company by Guzik & Associates, 1800 Century Park East, 5th Floor, Los Angeles, California 90067. Certain other legal matters are being passed upon for the Company by W. Sterling Mason Jr., Attorney at Law, 1487 Thistle Downs Drive, Sandy, Utah 84092. EXPERTS The consolidated financial statements of Private Media Group, Inc. at December 31, 1997, and for each of the two years in the period ended December 31, 1997 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young AB, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form SB-2 under the Securities Act (the "Registration Statement") with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contracts or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C., and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Commission maintains an Internet World Wide Web site that contains reports, proxy and information reports and other materials that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. The site can be accessed at http://www.sec.gov. Copies may also be obtained from the Company's principal offices at 3230 Flamingo Road, Suite 156, Las Vegas, Nevada 89121, or upon written request addressed to Private Media Group, Inc.'s Corporate Legal Counsel, W. Sterling Mason, Jr., 1487 Thistle Downs Drive, Sandy, Utah 84092. As of the date of this Prospectus, the Company will become subject to the reporting requirements of the Securities Exchange Act of 1934, and in accordance therewith will file reports, proxy statements and other information with the Securities and Exchange Commission. The Company intends to deliver annual reports to the holders of its securities, which will contain financial information that has been examined and reported upon by an independent certified public accountant and such other periodic reports as the Company deems appropriate or as may be required by law. The Company's fiscal year ends December 31. 72 INDEX TO FINANCIAL STATEMENTS
PAGE NO. -------- Report of Ernst & Young AB, Independent Auditors....................................... F-2 Consolidated Balance Sheets as of December 31, 1997, and June 30, 1998................. F-3 Consolidated Statements of Income and Comprehensive Income for the two years ended December 31, 1996 and 1997, and the six months ended June 30, 1998 and June 30, 1997................................................................ F-4 Consolidated Statements of Shareholders' Equity........................................ F-5 Statements of Cash Flows for the two years ended December 31, 1997 and 1996, and the six months ended June 30, 1998 and June 30, 1997.............................. F-6 Notes to Financial Statements.......................................................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Private Media Group Inc. We have audited the accompanying consolidated balance sheet of Private Media Group, Inc. and its subsidiaries as of December 31, 1997 and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Sweden and in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Private Media Group, Inc. and its subsidiaries as of December 31, 1997 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles in the United States of America. Stockholm, Sweden August 19, 1998 Ernst & Young AB - ---------------- /s/ Tom Bjorklund - ----------------- Tom Bjorklund F-2 PRIVATE MEDIA GROUP, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, (UNAUDITED) -------------- ------------------------- 1997 1998 1998 -------------- ------ ------ SEK SEK USD (in thousands) ASSETS Cash and cash equivalents........................... 3,698 2,790 350 Trade accounts receivable - (Note 4)................ 47,632 66,471 8,351 Inventories - net (Note 5).......................... 20,497 25,522 3,206 Prepaid expenses and other current assets (Note 6).. 4,174 10,862 1,365 ------- ------- ------ TOTAL CURRENT ASSETS................................ 76,001 105,644 13,272 Library of photographs and videos - net (Note 7).... 67,577 73,241 9,201 Property, plant and equipment - net (Note 8)........ 6,998 8,172 1,027 Other assets........................................ 12,112 14,076 1,768 ------- ------- ------ TOTAL ASSETS........................................ 162,688 201,133 25,268 ======= ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings (Note 9)...................... 1,604 - - Accounts payable trade.............................. 20,009 24,253 3,047 Income taxes payable................................ 859 829 104 Deferred tax liability (Note 11).................... 252 252 32 Accrued other liabilities (Note 10)................. 4,440 11,575 1,454 ------- ------- ------ TOTAL CURRENT LIABILITIES........................... 27,164 36,910 4,637 Long-term borrowings (Note 12)...................... 723 394 49 SHAREHOLDERS' EQUITY (Note 13) $4.00 Series A Convertible Preferred Stock.......... - - - 10,000,000 shares authorized 7,000,000 shares issued and outstanding Common Stock, $.001 par value, 50,000,000........... 7,992 7,997 1,005 shares authorized 7,500,000 and 8,081,668 issued and outstanding, respectively Additional paid-in capital.......................... - 731 92 Retained earnings................................... 126,809 154,991 19,471 Accumulated other comprehensive income.............. - 111 14 ------- ------- ------ TOTAL SHAREHOLDERS' EQUITY.......................... 134,801 163,830 20,582 ------- ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. 162,688 201,133 25,268 ======= ======= ======
See notes to consolidated financial statements. F-3 PRIVATE MEDIA GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED SIX-MONTHS ENDED DECEMBER 31, JUNE 30, (UNAUDITED) ----------------- ------------------------- 1996 1997 1997 1998 1998 ------- ------- ------ ------ ------- SEK SEK SEK SEK USD (in thousands) Net Sales..................................... 128,927 144,543 70,435 99,186 12,461 Cost of Sales................................. 66,963 75,674 31,170 46,680 5,864 ------- ------- ------ ------ ------ Gross Profit.................................. 61,964 68,869 39,265 52,506 6,596 Selling, general and administrative expenses.. 27,033 33,682 15,936 23,977 3,012 ------- ------- ------ ------ ------ Operating profit.............................. 34,931 35,187 23,329 28,529 3,584 Interest expense.............................. 259 321 90 259 33 Interest income............................... 72 69 21 124 16 ------- ------- ------ ------ ------ Income before income tax...................... 34,744 34,935 23,261 28,394 3,567 Income taxes.................................. 2,046 (2,052) 443 210 26 ------- ------- ------ ------ ------ Net income.................................... 32,698 36,987 22,818 28,183 3,541 ------- ------- ------ ------ ------ Other comprehensive income: Foreign currency adjustments.................. (365) 365 209 111 14 Comprehensive income.......................... 32,333 37,352 23,027 28,294 3,555 ======= ======= ====== ====== ====== Net income per share: Basic 4.36 4.93 3.04 3.49 0.44 ======= ======= ====== ====== ====== Diluted 2.26 2.43 1.49 1.80 0.23 ======= ======= ====== ====== ======
See notes to consolidated financial statements. F-4 PRIVATE MEDIA GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDI- ACCUMULATED TIONAL OTHER TOTAL Common Stock PREFERRED STOCK PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS' -------------------- --------------- Shares Amounts Shares Amounts capital earnings income equity --------- -------- -------- --------- ------- --------- ------ -------- SEK SEK SEK SEK SEK SEK Balance at January 1, 1996 7,500,000 7,992 7,000,000 63,783 (187) 71,588 Exchange Rate Changes (178) (178) Net Income 32,698 32,698 --------- -------- ---------- --------- ------- --------- ------ -------- Balance at December 31, 7,500,000 7,992 7,000,000 - - 96,481 (365) 104,108 1996 Exchange rate changes - 365 365 Dividends paid (6,660) - (6,660) Net income 36,987 - 36,987 --------- -------- ---------- --------- ------- ---------- ------ -------- Balance at December 31, 7,500,000 7,992 7,000,000 - - 126,808 - 134,800 1997 Shares issued in reverse acquisition 581,668 5 - - 731 - - 736 Exchange rate changes 111 111 Net income 28,183 - 28,183 --------- -------- ---------- --------- ------- ---------- ------ -------- Balance at June 30, 1998 (unaudited) 8,081,668 7,997 7,000,000 - 731 154,991 111 163,830 ========= ======== ========== ========= ======= ========== ====== ========
See notes to consolidated financial statements. F-5 PRIVATE MEDIA GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SIX-MONTHS ENDED DECEMBER 31, JUNE 30, (UNAUDITED) ---------------------- -------------------------- 1996 1997 1997 1998 1998 ---- ---- ---- ---- ---- SEK SEK SEK SEK USD (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income............................................... 32,698 36,987 22,818 28,183 3,541 ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH flows from operating activities: Deferred taxes.......................................... 1,655 (2,800) - - - Depreciation............................................ 1,939 1,366 632 1,830 230 Amortization of photographs and videos.................. 13,024 20,209 8,582 14,245 1,790 EFFECTS OF CHANGES IN OPERATING ASSETS AND LIABILITIES: Trade accounts receivable............................... 4,091 (15,936) (8,553) (18,839) (2,367) Inventories............................................. (7,132) (5,985) (1,080) (5,025) (631) Prepaid expenses and other current assets............... (102) 4,037 (5,895) (6,608) (830) Accounts payable trade.................................. 9,120 4,047 (2,168) 4,137 520 Income taxes payable.................................... 301 130 (37) (30) (4) Accrued other liabilities............................... (4,321) 2,640 2,051 7,135 896 ------ ------- ------ ------- ------ Net cash provided by operating activities................ 51,273 44,695 16,350 25,028 3,144 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in library of photographs and videos.......... 47,096 25,864 10,551 19,909 2,501 Capital expenditures..................................... 5,929 1,541 1,201 3,004 377 Investments in other assets.............................. 964 11,121 4,130 1,796 226 Cash acquired in reverse acquisition..................... - - - (595) (75) ------ ------- ------ ------- ------ Net cash used in investing activities.................... 53,989 38,526 15,882 24,114 3,029 CASH FLOW FROM FINANCING ACTIVITIES: Dividends paid........................................... - (6,660) - - - Long-term repayments..................................... (100) (409) - (329) (41) Short-term borrowings (repayments)....................... 816 788 (816) (1,604) (202) ------ ------- ------ ------- ------ Net cash (used in) provided by financing activities...... 716 (6,281) (816) (1,933) (243) Foreign currency translation adjustment.................. (178) 365 209 111 14 ------ ------- ------ ------- ------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..... (2,178) 253 (139) (908) (114) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD..... 5,623 3,445 3,445 3,698 465 ------ ------- ------ ------- ------ CASH AND CASH EQUIVALENTS AT END OF THE PERIOD........... 3,445 3,698 3,306 2,790 351 ====== ======= ====== ======= ====== Cash paid for interest................................... 259 310 90 259 33 ====== ======= ====== ======= ====== Cash paid for taxes...................................... 127 367 104 166 21 ====== ======= ====== ======= ======
See notes to consolidated financial statements. F-6 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Private Media Group, Inc. ("the Company") was originally incorporated on September 23, 1980 as Glacier Investment Company, Inc. under the laws of the State of Utah and, effective December 3, 1997, after a series of interim name changes, changed its name to Private Media Group, Inc. Effective June 12, 1998 the Company acquired Cine Craft Limited ("Cine Craft"), a Gibraltar corporation and Milcap Media Limited ("Milcap"), a Republic of Cyprus corporation. Prior to the acquisitions the Company was a holding company with no operations. Milcap and its subsidiaries and Cine Craft operate under common control and are engaged in the acquisition, refinement and distribution of video and photo rights for adult feature magazines and movies. The acquisition has been accounted for as a reverse acquisition whereby the Company is considered to be the acquiree even though legally it is the acquiror. Accordingly, the accompanying financial statements present the historical combined financial statements of Cine Craft and Milcap from January 1, 1996 through the acquisition date of June 12, 1998 and the consolidated financial statements of the Company, Cine Craft and Milcap since that date. Since the fair value of the net assets of the Company were equal to their net book value on June 12, 1998, the assets and liabilities of the Company remained at their historical cost following the acquisition. The accompanying financial statements have been presented in Swedish Kronor ("SEK") which is the principal currency in which Cine Craft and Milcap generate their cash flows. Solely for the convenience of the reader, the accompanying consolidated financial statements of June 30, 1998 and for the six months then ended have been translated into United States dollars ("USD") at the rate of SEK 7.96 per USD 1.00 the exchange rate of the Swedish Riksbank on June 30, 1998. The translations should not be construed as a representation that the amounts shown could have been, or could be, converted into US dollars at that or any other rate. 2. SUMMARY OF SIGNIFICANT AND ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. The financial statements of the Company and its subsidiaries are measured in the currency in which that company primarily conducts its business (the functional currency). The functional currency of all the Company's foreign operations is the applicable local currency. When translating functional currency financial statements into Swedish Kronor, year-end exchange rates are applied to asset and liability accounts, while average annual rates are applied to income statement accounts. Adjustments resulting from this process are recorded in a separate component of shareholders' equity. F-7 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Foreign currency transaction gains and losses resulting from the settlement of amounts receivable or payable denominated in a currency other than the functional currency are credited or charged to income. Inventories Inventories are valued at the lower of cost or market, with cost principally determined on an average basis. Inventories consists principally of video cassettes and magazines held for resale. Property, Plant and Equipment Property, plant and equipment are carried at cost and are generally depreciated using the straight-line method over the estimated useful lives of the assets. The useful lives range from 3-5 years. The Company evaluates the carrying value of property, plant and equipment for potential impairment on an ongoing basis. Recognition of Revenue Revenue from the sale of magazines and other related products is recognized upon delivery. Revenue from the sale of video products is recognized based upon reported sales to retail customers by the Company's distributors. Provisions for expected returns of product are recorded. Advertising Costs Advertising costs are charged to income as incurred. Income Taxes The Company accounts for certain income and expense items differently for financial reporting purposes than for tax purposes. Provision of deferred taxes are made in recognition of such temporary differences, following the requirements of Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes." It is the Company's current intention to re-invest the unremitted earnings of its non-U.S. subsidiaries indefinitely and accordingly no provision for U.S. income taxes or foreign withholding taxes has been provided. Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less at the time of acquisition are considered cash equivalents. Library of Photographs & Videos The library of photographs and videos, including rights for photographs and videos as well as translation and dubbing of video material, is reflected at the lower of amortized cost or net realizable value. The cost is amortized on a straight-line basis over 3-5 years representing the estimated useful life of the asset. Estimated future F-8 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS revenues are periodically reviewed and, revisions may be made to amortization rates or write-downs made to the asset's net realizable value as a result of significant changes in future revenue estimates. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and exploit in a manner consistent with realization of that income. Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less at the time of acquisition are considered cash equivalents. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrated credit risks consist primarily of cash and trade receivables. Credit risk on trade receivables is minimized as a result of the use of bank guarantees and credit control. The Company maintains cash and equivalents with various financial institutions. The Company policy is designed to limit exposure to any one institution. Basic and Diluted Earnings Per Share In 1997, the Financial Accounting Standards Board issue Statement No. 128 "Earnings per Share" (SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. The earnings per share amounts have been restated to conform to SFAS 128 requirements (see note 14). Fair Value of Financial Instruments The carrying value of financial instruments such as cash, accounts receivable, accounts payable and short-term borrowings approximate their fair value based on the short-term maturities of these instruments. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Interim Financial Statements The financial information at June 30, 1998, and for the six months ended June 30, 1997 and 1998, is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for these periods. Results of the 1998 period are not necessarily indicative of results that may be expected for the entire year. F-9 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. BUSINESS ACQUISITION On June 12, 1998, the Company acquired (a) all of the outstanding common stock of Cine Craft in exchange for the issuance of 7,500,000 shares of common stock and 700,000 common stock purchase warrants of the Company, and (b) all of the outstanding common stock of Milcap in exchange for the issuance of 7,000,000 shares of $4.00 series A convertible preferred stock and 175,000 common stock purchase warrants of the Company. Generally accepted accounting principles require that the Company be considered the acquired company for financial statement purposes (a reverse acquisition) even though the entity will continue to be called Private Media Group, Inc. Therefore, the acquisition has been recorded as a recapitalization of Cine Craft and Milcap. The effects of the reverse acquisition have been reflected for all share amounts in the accompanying financial statements. The Company had no operations at the time of the reverse acquisition. The shares issued in the reverse acquisition represent the outstanding shares of the Company at the date of the reverse acquisition. 4. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consist of the following:
DECEMBER 31, 1997 -------------- SEK (in thousands) Trade accounts receivable.................. 49,013 Allowance for doubtful accounts............ (1,381) -------------- Total trade accounts receivable............ 47,632 ==============
5. INVENTORIES Inventories consist of the following:
DECEMBER 31, 1997 -------------- SEK (in thousands) Magazines.................................. 12,355 Video cassettes............................ 6,342 Other...................................... 1,800 -------------- 20,497 ==============
F-10 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER ASSETS Included in other assets at December 31, 1997, is an amount of SEK 11,190 thousand representing the deposit on the purchase of certain land and building. 7. LIBRARY OF PHOTOGRAPHY & VIDEOS Library of photographs & videos consist of the following:
DECEMBER 31, 1997 -------------- SEK (in thousands) Gross: Photographs.................................................. 25,147 Videos....................................................... 88,236 Translations, Sound Dubbing, & Sub-Titles for Video Library.. 18,845 ------------ 132,228 ============ Less accumulated depreciation: Photographs.................................................. 13,647 Videos....................................................... 42,304 Translations, Sound Dubbing, & Sub-Titles for Video Library.. 8,696 ------------ 64,647 ============ Net: Photographs.................................................. 11,500 Videos....................................................... 45,928 Translations, Sound Dubbing, & Sub-Titles for Video Library.. 10,149 ------------ 67,577 ============
F-11 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, 1997 -------------- SEK (IN THOUSANDS) Equipment and Furniture................... 7,967 Leasehold Improvements.................... 2,437 Accumulated Depreciation.................. (3,406) -------- Total Property, Plant and Equipment, net.. 6,998 ========
F-12 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. SHORT-TERM BORROWINGS The Company's Swedish subsidiary has a line of credit amounting to SEK 1,000 thousand. Use of the credit facility is charged at 9.50%, which is equal to the Swedish banks' current official interest rate and which was the rate of interest on outstanding borrowings at December 31, 1997. The renewal date of the facility is every calendar quarter. The line of credit is guaranteed by the principal shareholder. The Company pays an annual facility fee of 2.00% on the line of credit amount. At December 31, 1997 the borrowings under the line of credit of SEK 1,604 thousand exceeded the credit line. 10. ACCRUED OTHER LIABILITIES Accrued other liabilities is comprised of the following:
DECEMBER 31, 1997 ------------- SEK (IN THOUSANDS) Accrued Taxes............................... 65 Deposits.................................... 158 Accrued Salaries............................ 719 Royalty..................................... 470 Accrued Expenses............................ 1,687 Expected returns............................ 634 Vacation pay................................ 132 Social Security............................. 417 Other....................................... 158 ----- 4,440 =====
11. INCOME TAX Pretax income (loss) for the years ended December 31, 1996 and 1997 was taxed in the following jurisdictions:
DECEMBER 31, ------------------- 1996 1997 --------- -------- (SEK IN THOUSANDS) Gibraltar............................ 28,500 41,100 Cyprus............................... 1,412 1,184 Sweden............................... 4,659 (4,606) Spain................................ 191 (2,784) Other................................ (18) 41 ------ ------ 34,744 34,935 ====== ======
F-13 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The components of the provision for income tax (benefit) are as follows:
DECEMBER 31, ------------------- 1996 1997 --------- -------- (SEK IN THOUSANDS) Current: Cyprus........................... 70 62 Sweden........................... 264 230 Spain............................ 57 456 Deferred: Sweden........................... 1,655 (1,509) Spain............................ - (1,291) ------ ------ 2,046 (2,052) ====== ======
A reconciliation of income taxes determined using the Swedish statutory rate of 28% to actual income taxes provided is as follows:
DECEMBER 31, ----------------------- 1996 1997 --------- --------- (SEK IN THOUSANDS) Income tax expenses at statutory rates..... 9,728 9,781 Income in Gibralter not subject to tax..... (7,980) (11,508) Foreign tax rate differential.............. (326) (479) Other, net................................. 624 154 ------ ------- Income tax (benefit) provided.............. 2,046 (2,052) ====== =======
F-14 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. RELATED PARTY TRANSACTIONS The Company has long term borrowings of SEK 723 thousands at December 31, 1997. The borrowings bear interest at a rate of 10% payable annually and are due to entities controlled by the Company's principal shareholder. The borrowings have no maturity date. 13. SHAREHOLDERS' EQUITY Retained Earnings The Company is a holding company with no operations of its own. Accordingly, the retained earnings of the Company represent the accumulated earnings of its foreign subsidiaries, principally CineCraft. The ability of the Company to pay dividends is dependent on the transfer of accumulated earnings from these subsidiaries. The Company is not currently aware of any significant restrictions that would inhibit its ability to pay dividends should it choose to do so. Common stock The Company is authorized to issue 50,000,000 shares of common stock. Holders of common stock are entitled to one vote per share. The common stock is not redeemable and has no conversion or preemptive rights. Preferred stock The Company is authorized to issue 10,000,000 shares of preferred stock with relative rights, preferences and limitations determined at the time of issuance. The Company has issued 7,000,000 shares of $4.00 Series A convertible Preferred stock. The Series A stock is non-voting and provides for a 5% annual stock dividend beginning in 1998 to be paid quarterly in common stock at the average closing price of the Company's common stock for the twenty consecutive days prior to the quarterly record date. Each preferred share is convertible at any time into common shares on a one for one basis. Additionally, at any time the common stock of the Company has a closing price of less than $4.00 per share for twenty consecutive days the preferred stock may be converted at the option of the holder thereof into common stock at 20% discount to the five day average closing price prior to the date of conversion. Common stock warrants The Company has issued 875,000 common stock warrants which are exercisable at any time by the holder thereof until December 31, 2000 at an exercise price of $4.00 per share. F-15 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED SIX-MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- NUMERATOR: Net income (SEK in thousands) 32,698 36,987 22,818 28,183 ========== ========== ========== ========== DENOMINATOR: Denominator for basic earnings per share - Weighted average shares 7,500,000 7,500,000 7,500,000 8,081,668 Effect of dilutive securities: Preferred stock 7,000,000 7,000,000 7,000,000 7,000,000 Common stock warrants - 712,888 764,485 561,661 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - weighted average shares and assumed conversions 14,500,000 15,212,882 15,264,485 15,643,330 ========== ========== ========== ========== EARNINGS PER SHARE (SEK) Basic 4.36 4.93 3.04 3.49 ========== ========== ========== ========== Diluted 2.26 2.43 1.49 1.80 ========== ========== ========== ==========
Common stock warrants were not included in the calculation of diluted earnings per share in 1996 because the exercise price was greater than the average market price. 15. COMMITMENTS AND CONTINGENT LIABILITIES The Company leases certain property and equipment under operating leases. The rental payments under these leases are charged to operations as incurred. Rental expense for the years ended December 31, 1996 and 1997 amounted to SEK 976 thousand and SEK 1,485 thousand, respectively. Future minimum payments under non-cancelable leases as of December 31, 1997 are as follows: Year (SEK in thousands) ---------- ------------------------ 1998 1,661 1999 1,426 2000 1,426 2001 898 2002 374 Thereafter F-16 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. OPERATIONS BY GEOGRAPHICAL AREA The Company operates in one business segment, which is the acquisition, refinement and distribution of video and photo rights for adult feature magazines and movies. Information concerning the Company's geographic locations is summarized as follows:
DECEMBER 31, ------------------- 1996 1997 -------- --------- (SEK IN THOUSANDS) Net Sales Gibraltar.................. 28,500 41,100 Cyprus..................... 41,547 62,410 Sweden..................... 103,359 120,281 Spain...................... 32,438 42,800 Eliminations............... (76,917) (122,048) ------- -------- Total........................... 128,927 144,543 ======= ========
Eliminations principally relates to revenues arising from trademark, license and distribution agreements between the Gibralter, Cyprus and Sweden companies.
DECEMBER 31, ------------------- 1996 1997 --------- -------- (SEK in thousands) Operating profit Gibraltar.................................. 28,500 41,100 Cyprus..................................... 1,423 1,227 Sweden..................................... 4,907 (4,427) Spain...................................... 204 (2,653) Other...................................... (103) (60) ------- ------- Total...................................... 34,931 35,187 Interest expense, net...................... 187 252 ------- ------- Income before income taxes................. 34,744 34,935 ======= ======= Identifiable assets Gibraltar.................................. 5,718 12 Cyprus..................................... 53,636 67,661 Sweden..................................... 56,698 68,457 Spain...................................... 11,546 26,558 ------- ------- Total...................................... 127,598 162,688 ======= =======
F-17 PRIVATE MEDIA GROUP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Export sales from Sweden to unaffiliated customers amounted to SEK 92.0 million and SEK 102.8 million for the years ended December 31, 1996 and 1997, respectively. Export sales from Spain to unaffiliated customers amounted to SEK 4.3 million and SEK 6.4 million for the years ended December 31, 1996 and 1997, respectively. Export sales from other geographic areas are insignificant. 17. ADVERTISING COSTS The total advertising costs were SEK 1,068 thousand and SEK 1,156 thousand for the years ended December 31, 1996 and 1997, respectively. 18. RECENT PRONOUNCEMENTS In June 1998 the FASB issued Statement No. 133, Accounting for Derivative Instruments and for Hedging Activities. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 133 is effective for fiscal years beginning after June 15, 1999, and Statement No. 131 is effective for fiscal years beginning after December 15, 1997. Statement No. 131 will modify certain existing geographical area disclosures of the Company. Statement No. 133 will not affect the Company as it does not enter into derivative or hedging activities. F-18 No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the shares of Common Stock offered by this Prospectus, or an offer to sell or a solicitation of any offer to buy any security by any person in any jurisdiction in which such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, imply that the information in this Prospectus is correct as of any time subsequent to the date of this Prospectus. TABLE OF CONTENTS Page ---- Prospectus Summary.................................................. 2 Risk Factors........................................................ 5 Capitalization...................................................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 14 Business............................................................ 17 Management.......................................................... 57 Certain Relationships and Related Transactions...................... 61 Principal Stockholders.............................................. 62 Description of Securities........................................... 64 Shares Eligible for Future Sale..................................... 68 Selling Stockholders and Plan of Distribution....................... 70 Legal Matters....................................................... 72 Experts............................................................. 72 Available Information............................................... 72 Index to Financial Statements....................................... F-1 Until , 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers The registrant has the power to indemnify its directors and officers against liability for certain acts pursuant to the laws of Nevada, being the Registrant's state of incorporation. In addition, under the Articles of Incorporation of the Registrant, no director, officer or agent is personally liable to the corporation or its stockholders for monetary damages arising out of a breach of such person's fiduciary duty to the Registrant, unless such breach involves intentional misconduct, fraud or a knowing violation of law, or the payment of an unlawful dividend. Item 25. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, payable by the registrant in connection with the sale of the Common Stock being registered. All amounts are estimated except the Commission Registration Fee, and the Nasdaq Stock Market Application Fee. SEC Registration Fee.......................................... $13,865.00 Nasdaq Stock Market Application Fee..... ..................... 5,000.00 Blue Sky Qualification Fees and Expenses...................... 1,000.00 Accounting Fees and Expenses.................................. 90,000.00 Legal Fees and Expenses....................................... 75,000.00 Transfer Agent and Registrar Fees............................. 1,000.00 Printing and Engraving........................................ 5,000.00 Miscellaneous................................................. 1,000.00 Total.................................................... $191,865.00 =========== Item 26. Recent Sales of Unregistered Securities During the past three years, the registrant has issued the securities set forth below which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). 1. In March 1997 the Company completed an offering of Units pursuant to Rule 504 of Regulation D under the Securities Act. Each Unit consisted of the Company's Common Stock and two classes of Warrants, and resulted in $250,000 of gross proceeds from the sale of the Units. The Warrants were fully exercised by March 1998, resulting in additional proceeds of $522,000. 2. In June 1998 the Company issued 7,500,000 shares of Common Stock and 700,000 common stock purchase Warrants, exercisable at $4.00 per share, to 14 accredited investors in consideration of the acquisition of all of the outstanding capital stock of Cinecraft Ltd. In a related acquisition the Company issued 7,000,000 shares of its $4.00 Series A Convertible Preferred Stock and 175,000 common stock purchase Warrants to a single accredited investor II-1 in consideration of the acquisition of Milcap Media Limited. These securities were issued by the Company as restricted securities in reliance upon the exemption afforded under Section 4(2) of the Securities Act. II-2 Item 27. Exhibit and Financial Statement Schedules Exhibit Number Description of Document - ------ 3.1 Articles of Incorporation *3.2 Bylaws *4.1 Specimen Common Stock Certificate *4.2 Specimen Warrant Certificate *4.3 Specimen Preferred Stock Certificate *4.4 Form of Warrant Agreement including form of Warrant *5.1 Opinion of Guzik & Associates 10.1 Milcap Acquisition Agreement dated December 19, 1997 10.2 Cinecraft Acquisition Agreement dated December 19, 1997 *11.1 Statement re: computation of per share earnings 23.1 Consent of Ernst & Young *23.2 Consent of Guzik & Associates (included in Exhibit 5.1) 24.1 Power of Attorney (included on pages II-4 and II-5) 27.1 Financial Data Schedule - ---------------------------- * To be filed by amendment. Item 28. Undertakings (1) The undersigned Registrant hereby undertakes that it will: (a) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act, II-3 (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement, and (iii) Include any additional or changed material information on the plan of distribution. (b) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (c) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of this offering. (2) The undersigned Registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of each issue. (4) The undersigned Registrant hereby undertakes that it will: (a) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective. (b) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and the offering of such securities at that time as the initial bona fide offering of those securities. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lugano, Switzerland on August 19, 1998. PRIVATE MEDIA GROUP, INC. By: /s/ Alfredo M. Villa ----------------------------------------------- Alfredo M. Villa Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Alfredo M. Villa and Berth H. Milton his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, each acting alone, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. II-5 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form SB-2 has been signed by the following persons in the capacities and on the dates indicated. Name Title Date /s/ Alfredo M. Villa Chairman of the Board August 19, 1998 - --------------------------- and Chief Executive Alfredo M. Villa Officer, Director /s/ Berth H. Milton Director August 19, 1998 - --------------------------- Berth H. Milton August 19, 1998 /s/ Bo Rodebrant Director - --------------------------- Bo Rodebrant /s/ Johan Gillborg Chief Financial August 19, 1998 - --------------------------- Officer, Chief Johan Gillborg Accounting Officer II-6 EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CHARIOT 7 PRODUCTIONS, INC. PURSUANT TO NEVADA REVISED STATUTE 78.403 We, being the original incorporators of Chariot 7 Productions, Inc., declare that we are the original incorporators of said corporation filed December 11, 1990. We declare that to this date, no part of the capital has been paid. By virtue of 78.380 and 78.403, we hereby modify and amend the Articles of Incorporation of Chariot 7 Productions, Inc. in their entirety and restate them as follows: ARTICLE I --------- Name. The name of the corporation (hereinafter called the "Corporation") ---- is Chariot 7 Productions, Inc. ARTICLE II ---------- Period of Duration. The period of duration of the Corporation is ------------------ perpetual. ARTICLE III ----------- Purposes and Powers. The purpose for which this Corporation is organized ------------------- is to acquire oil and gas leases, properties and patents, to invest in and acquire stocks, bonds, business investments, real estate investments and to engage in any and all other lawful business. ARTICLE IV ---------- Capitalization. The Corporation shall have the authority to issue -------------- 50,000,000 shares of common stock with each share of common stock having a par value of $.001 (one mil). All common stock of the Corporation is of the same class and shall have the same rights and preferences. In addition, the Corporation shall have the authority to issue 50,000,000 voting, cumulative, and convertible preferred shares with a par value of $.001 (one mil) per share. The preferred shares shall be entitled to one vote per share and shall have a liquidation preference, over common shares, as set forth herein or under U.C.A. 16-10-15, as amended. The Board of Directors of the Corporation shall have the express authority to divide the preferred shares into series and, within the limitations set forth in U.C.A. 16-10-15, as amended, and the Articles of Incorporation, fix and determine the relative rights and preferences of the shares of any such series so established. The first series of preferred stock shall be established by this Amendment to the Articles of Incorporation. This shall be entitled Class "A" and shall number 1,400,000 shares. This series shall be entitled to a dividend equal to 97.5% of all net income, after taxes, received by this Corporation 1 which is derived from the properties contributed to this Corporation by Chariot Entertainment Ltd., a California Limited Partnership. At such time that the total of such dividends equals the par value of all shares of this series outstanding, said dividend shall be reduced to 80% of the net income, after taxes, from said source until 60 months from the date of the issuance of said Class "A" shares. The aforementioned Class "A" preferred stock may be converted to a one for one basis into the common shares of this Company, at the discretion of the holder thereof, during the period beginning 24 months after their issuance and ending 60 months after their issuance. After the 60 months, any of the Class "A" preferred shares hereunder which have not been converted into common stock, previously, shall automatically convert on a one for one basis into the common stock of this Company. Until such time within the aforementioned 60 months that the total of dividends equals the par value of the Class "A" shares, each share shall have a liquidation preference, whether voluntary or involuntary, equal to the difference between par value and all dividends received. Fully-paid stock of this Corporation shall not be liable for further call or assessment. All shares, either common or preferred, shall be issued at the discretion of the directors. ARTICLE V --------- Incorporators. The name and post office address of each incorporator is: ------------- 1. KURTIS D. HUGHES 2325 Arbor Lane, Salt Lake City, Utah 84117 2. SUSAN SANTAGE 2325 Arbor Lane, Salt Lake City, Utah 84117 3. SHIRRELL W. HUGHES 2929 Hillsden Drive, Salt Lake City, Utah 84117 ARTICLE VI ---------- Directors. The corporation shall be governed by a Board of Directors consisting - --------- of no less than three (3) and no more than nine (9) directors. Directors need not be stockholders in the Corporation but shall be elected by the stockholders of the Corporation. The number of Directors constituting the initial Board of Directors is three (3) and the name and post office address of the persons who shall serve as Directors until their successors are elected and qualified are: 1. KURTIS D. HUGHES 2325 Arbor Lane, Salt Lake City, Utah 84117 2. SUSAN SANTAGE 2325 Arbor Lane, Salt Lake City, Utah 84117 3. SHIRRELL W. HUGHES 2929 Hillsden Drive, Salt Lake City, Utah 84117 2 ARTICLE VII ----------- Commencement of Business. The Corporation shall not commence business ------------------------ until at least One Thousand Dollars ($1,000) has been received by the Corporation as consideration for the issuance of its shares. ARTICLE VIII ------------ Preemptive Rights. There shall be no preemptive right to acquire unissued ----------------- and/or treasury shares of the stock of the Corporation. ARTICLE IX ---------- Voting of Shares. Each outstanding share of stock of the Corporation ---------------- whether common or preferred shall be entitled to one vote on each matter submitted to vote at the meeting of stockholders. Each stockholder shall be entitled to vote his or its shares in person or by proxy, executed in writing by such stockholder, or by his duly authorized attorney-in-fact. At each election of Directors, every stockholder entitled to vote in such election shall have the right to vote in person or by proxy the number of shares owned by him or it for as many persons as there are directors to be elected and for whose election he or it has the right to vote, but the shareholder shall have no right to accumulate his or its votes with regard to such election. ARTICLE X --------- Initial Registered Office and Initial Registered Agent. The address of the ------------------------------------------------------ initial registered office of the Corporation is 4230 South Pecos, Las Vegas, Nevada 89121 and the initial registered agent of the corporation at such address is Gateway Enterprises, Inc. __________________________________ __________________________________ __________________________________ 3 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF CHARIOT 7 PRODUCTIONS, INC. Pursuant to Nevada Statute, the following Amendments to the Articles of Incorporation of the Company were taken, without meeting, pursuant to authorization by the written consent of Shareholders holding over a majority of the outstanding voting power of the Company. I. Article I of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE I Name. The name of the Corporation (hereinafter called the Corporation) is - ---- Upscale Trends, Inc. II. Article IV of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE IV Capitalization. The Corporation shall have the authority to issue 50,000,000 - -------------- shares of common stock with each share of common stock having a par value of $.001 (one mil). The common stock of the Corporation is of the same class and shall have the same rights and preferences. Fully paid stock of the Corporation shall not be liable for further call or assessment. All shares shall be issued at the discretion of the directors. III The first sentence of Article VI shall be amended to read as follows: Directors. The corporation shall be governed by a Board of Directors no less - --------- than one (1) and no more than nine (9) directors. IV Article IX of the Articles of Incorporation of the Corporation shall be amended to provide that each outstanding share of stock shall be entitled to one vote on each matter submitted to a vote at a meeting of Shareholders. The remainder, of any said article, shall remain the same. 1 V A new Article shall be created which shall be numbered Article XI. It shall read as follows: By-Laws. The By-Laws of the Corporation may be amended, repealed, or restated, - ------- in any manner, by either the Board of Directors of the Corporation or the Shareholders of the Corporation. Any By-Law, after this date, specifically adopted or amended by the Shareholders of the Corporation may not be amended, altered, or changed without the approval of the Shareholders of the Corporation. VI A new article shall be created which shall be numbered Article XII. It shall read as follows: Liability of Directors and Officers. No director or officer shall be personally - ----------------------------------- liable to the corporation or stockholders for monetary damages for any breach of fiduciary duty by such person as a director or officer. Notwithstanding the foregoing sentence, the director or officer shall be liable to the extent provided by the applicable laws, (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (ii) for payment of dividends in violation of N.R.S. 78.300. The provisions hereof shall not apply to or have any effect on the liability or alleged liability of any officer or director of the corporation for or with respect to any acts or omissions of such person occurring prior to this amendment. VII Shareholders holding over a majority of the outstanding shares, voted for a 10 for 1 reverse split of the outstanding shares of the Company while maintaining authorized shares at 50,000,000 shares with a par value of $.001 (one mil) per share. At the time of said authorization there were 23,083,333 common shares outstanding. After the aforementioned reverse split there will be 2,308,334 common shares outstanding. VIII All of the aforementioned amendments to the Articles of Incorporation were adopted, without meeting and pursuant to Nevada Statute, by Shareholders holding over a majority of the outstanding shares of the Corporation on 28th day of June, 1994. At the time of said resolutions, without meeting, there were 23,083,333 common shares outstanding and 0 preferred shares, all of which were entitled to vote, and the vote in favor, without meeting, of said amendments equaled 15,000,000. The undersigned being the President and Secretary of the Corporation do hereby certify that the aforementioned Amendments to the Articles of Incorporation properly represent the amendments approved, without meeting, by the Shareholders holding over a majority of the outstanding shares of the corporation, and that said amendments were approved by said Shareholders by the 2 aforementioned vote. In addition, the undersigned, being President and Secretary of the Corporation, do hereby certify that written consent of said action was received in accordance of the provisions of Nevada Statutes. /s/ R. Kenneth Jarrell /s/ Sharon Lundskog Bailey - -------------------------------- ------------------------------------ R. Kenneth Jarrell, President Sharon Lundskog Bailey, Secretary 3 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF UPSCALE TRENDS, INC. Pursuant to Nevada Statute, the following Amendments to the Articles of Incorporation of the Company were taken, without meeting, pursuant to authorization by the written consent of Shareholders holding over a majority of the outstanding voting power of the Company. I. Article XII of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE XII Liability of Directors, Officers and Agents. No director, officer, or agent, to - ------------------------------------------- include legal counsel, shall be personally liable to the corporation or stockholders for monetary damages for any breach of fiduciary duty by such person as a director or officer. Notwithstanding the foregoing sentence, the director, officer or agent shall be liable to the extent provided by the applicable laws (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (ii) for payment of dividends in violation of NRS 78.300. The provisions hereof shall not apply to or have any effect on the liability or alleged liability of any agent of the corporation for or with respect to any acts or omissions of such person occurring prior to this amendment. II. A new article shall be created which shall be numbered Article XIII. It shall read as follows: ARTICLE XIII No Application. The corporation shall NOT be governed by nor shall the provisions of NRS 78.378 through and including NRS 78.3793 and NRS 78.411 through and including NRS 78.444 in any way whatsoever affect management, operation, or be applied to this Corporation. III A new article shall be created which shall be numbered Article XIV. It shall read as follows: ARTICLE XIV Common Directors. As provided in NRS 78.140, without repeating the section in full here, the same is adopted and no contract or other transaction between this Corporation and any of its officers, directors, or agents shall be deemed void or voidable solely for that reason. The balance of the provisions of the code section cited, as it now exists, allowing such transactions, is hereby incorporated in the Article as though more fully set forth. IV All of the aforementioned amendments to the Articles of Incorporation were adopted, without meeting and pursuant to Nevada Statute, by Shareholders holding over a majority of the outstanding shares of the Corporation on 1st day of December, 1996. At the time of said resolutions, without meeting, there were 2,308,336 common shares outstanding, all of which were entitled to vote, and the vote in favor, without meeting, of said amendments equaled 1,200,000. The undersigned being the President and Secretary of the Corporation do hereby certify that the aforementioned Amendments to the Articles of Incorporation properly represent the amendments approved, without meeting, by the Shareholders holding over a majority of the outstanding shares of the corporation, and that said amendments were approved by said Shareholders by the aforementioned vote. In addition, the undersigned, being President and Secretary of the Corporation, do hereby certify that written consent of said action was received in accordance of the provisions of Nevada Statutes. /s/ Kenneth Jarrell /s/ Sharon Lundskog Bailey - ------------------------------ --------------------------------- R. Kenneth Jarrell, President Sharon Lundskog Bailey, Secretary ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF UPSCALE TRENDS, INC. Pursuant to Nevada Statute, the following Amendments to the Articles of Incorporation of the Company were taken, without meeting, pursuant to authorization by the written consent of Shareholders holding over a majority of the outstanding voting power of the Company. I. Article I of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE I Name. The name of the Corporation (hereinafter called the Corporation) is - ---- Electric Entertainment International, Inc. IV. All of the aforementioned amendments to the Articles of Incorporation were adopted, without meeting and pursuant to Nevada Statute, by Shareholders holding over a majority of the outstanding shares of the Corporation on 5th day of March, 1997. At the time of said resolutions, without meeting, there were 2,308,336 common shares outstanding, all of which were entitled to vote, and the vote in favor, without meeting, of said amendments equaled 1,200,000. The undersigned being the President and Secretary of the Corporation does hereby certify that the aforementioned Amendments to the Articles of Incorporation properly represent the amendments approved, without meeting, by the Shareholders holding over a majority of the outstanding shares of the corporation, and that said amendments were approved by said Shareholders by the aforementioned vote. In addition, the undersigned, being President and Secretary of the Corporation, does hereby certify that written consent of said action was received in accordance of the provisions of Nevada Statutes. /s/ Alfredo M. Villa - ----------------------------------------- Alfredo M. Villa, President and Secretary ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF UPSCALE TRENDS, INC. Pursuant to Nevada Statute, the following Amendments to the Articles of Incorporation of the Company were taken, without meeting, pursuant to authorization by the written consent of Shareholders holding over a majority of the outstanding voting power of the Company. I. Article I of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE I Name. The name of the Corporation (hereinafter called the Corporation) is - ----- Electric Entertainment International, Inc. IV. All of the aforementioned amendments to the Articles of Incorporation were adopted, without meeting and pursuant to Nevada Statute, by Shareholders holding over a majority of the outstanding shares of the Corporation on 5th day of March, 1997. At the time of said resolutions, without meeting, there were 2,308,336 common shares outstanding, all of which were entitled to vote, and the vote in favor, without meeting, of said amendments equaled 1,200,000. The undersigned being the President and Secretary of the Corporation does hereby certify that the aforementioned Amendments to the Articles of Incorporation properly represent the amendments approved, without meeting, by the Shareholders holding over a majority of the outstanding shares of the corporation, and that said amendments were approved by said Shareholders by the aforementioned vote. In addition, the undersigned, being President and Secretary of the Corporation, does hereby certify that written consent of said action was received in accordance of the provisions of Nevada Statutes. /s/ Alfredo M. Villa - ----------------------------------------- Alfredo M. Villa, President and Secretary ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF ELECTRIC ENTERTAINMENT INTERNATIONAL, INC. Pursuant to Nevada Statute, the following Amendments to the Articles of Incorporation of the Company were taken, without meeting, pursuant to authorization by the written consent of Shareholders holding over a majority of the outstanding voting power of the Company. I. Article IV of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE IV Capitalization. The Corporation shall have the authority to issue 50,000,000 - -------------- shares of common stock with each share of common stock having a par value of $.001 (one mil). The common stock of the Corporation is of the same class and shall have the same rights and preferences. The Corporation shall have the authority to issue 10,000,000 shares of preferred stock with each share of preferred stock having a par value of $.001 (one mil). The Board of Directors of the Corporation shall have the authority to fix the designations, rights, and preferences or other variations of this class or any series within this class. Fully paid stock of the Corporation shall not be liable for further call or assessment. All shares shall be issued at the direction of the Board of Directors. II. All of the aforementioned amendments to the Articles of Incorporation were adopted, without meeting and pursuant to Nevada Statute, by Shareholders holding over a majority of the outstanding shares of the Corporation on 17th day of April, 1997. At the time of said resolutions, without meeting, there were 2,508,336 common shares outstanding, all of which were entitled to vote, and the vote in favor, without meeting, of said amendments equaled 1,466,000. The undersigned being the President and Secretary of the Corporation does hereby certify that the aforementioned Amendments to the Articles of Incorporation properly represent the amendments approved, without meeting, by the Shareholders holding over a majority of the outstanding shares of the corporation, and that said amendments were approved by said Shareholders by the aforementioned vote. In addition, the undersigned, being President and Secretary of the Corporation, does hereby certify that written consent of said action was received in accordance of the provisions of Nevada Statutes. /s/ Alfredo M. Villa - -------------------------------------------- Alfredo M. Villa, President and Secretary ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF ELECTRIC ENTERTAINMENT INTERNATIONAL, INC. Pursuant to Nevada Statute, the following Amendments to the Articles of Incorporation and other actions of the Company were taken, without meeting, pursuant to authorization by the written consent of Shareholders holding over a majority of the outstanding voting power of the Company. I. Article I of the Articles of Incorporation of the Corporation shall be amended to read as follows: ARTICLE I Name. The name of the Corporation (hereinafter called the Corporation) is Private Media Group, Inc. II. All of the aforementioned amendments to the Articles of Incorporation were adopted, without meeting and pursuant to Nevada Statute, by Shareholders holding over a majority of the outstanding shares of the Corporation on 11th day of November, 1997. At the time of said resolutions, without meeting, there were 2,718,461 common shares outstanding, all of which were entitled to vote, and the vote in favor, without meeting, of said amendments equaled 1,641,025. In addition, the aforementioned shareholders approved a one for five reverse split of the outstanding common stock of the Company, which maintaining the capitalization at 50,000,000 shares authorized and par value $.001. This will result in a reduction of the outstanding common shares of the Company to approximately 543,693. No fractional shares will be issued. Any fractional share that might have resulted from the reverse split will be rounded up to next whole share. The undersigned being the President and Secretary of the Corporation does hereby certify that the aforementioned Amendments to the Articles of Incorporation properly represent the amendments approved, without meeting, by the Shareholders holding over a majority of the outstanding shares of the corporation, and that said amendments were approved by said Shareholders by the aforementioned vote. In addition, the undersigned, being President and Secretary of the Corporation, does hereby certify that written consent of said action was received in accordance of the provisions of Nevada Statutes. /s/ Alfredo M. Villa - ------------------------------------------- Alfredo M. Villa, President and Secretary CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF PRIVATE MEDIA GROUP, INC. $4.00 SERIES "A" CUMULATIVE CONVERTIBLE PREFERRED STOCK $0.001 PAR VALUE The undersigned duly authorized officers of Private Media Group, Inc., a corporation organized and existing under the General Corporation Law of the State of Nevada (the "Corporation"), DO HEREBY CERTIFY: FIRST: That pursuant to authority expressly vested in the Board of Directors of said corporation by the provisions of its Articles of Incorporation, as amended, said Board of Directors duly adopted the following resolution: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by Article IV of the Corporation's Articles of Incorporation, as amended, a series of preferred stock of the Corporation be, and it hereby is, created out of the authorized but unissued shares of the capital stock of the Corporation, such series to be designated $4.00 Series "A" Cumulative Convertible Preferred Stock (the "$4.00 Series 'A' Preferred Stock"), to consist of 7,000,000 shares, $0.001 par value per share, of which the designations, powers, rights, preferences and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth in the Corporation's Articles of Incorporation, as amended) as follows: 1. CERTAIN DEFINITIONS. Unless the context otherwise requires, the terms defined in this paragraph 1 shall have, for all purposes of this resolution, the meanings herein specified. BOARD OF DIRECTORS. The term "Board of Directors" shall mean the Board of Directors of this Corporation, and, to the extent permitted by law and the Articles of Incorporation and Bylaws of this Corporation, any committee of such Board of Directors authorized to exercise the powers of such Board of Directors. COMMON STOCK. The term "Common Stock" shall mean all shares now or hereafter authorized of any class of Common Stock of the Corporation and any other stock of the Corporation, howsoever designated, authorized after the Issue Date, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in the distribution of the assets and earnings of the Corporation without limit as to per share amount. CONVERSION DATE. The term "Conversion Date" shall have the meaning set forth in subparagraph 4(d) below. CONVERSION PRICE. The term "Conversion Price" shall mean the price per share of Common 1 Stock used to determine the number of shares of Common Stock deliverable upon conversion of each share of the $4.00 Series "A" Preferred Stock, subject to certain adjustments in accordance with the provisions of paragraph 4 below. CURRENT MARKET PRICE. The term "Current Market Price" shall have the meaning set forth in subparagraph 4(g) below. DIVIDEND PAYMENT DATE. The term "Dividend Payment Date" shall have the meaning set forth in subparagraph 2(a) below. DIVIDEND PERIOD. The term "Dividend Period" shall have the meaning set forth in subparagraph 2(a) below. DIVIDEND RATE. The term "Dividend Rate" shall mean the annual rate used to determine the amount of dividends payable each year on each outstanding full share of $4.00 Series "A" Preferred Stock set forth in subparagraph 2(a) below. ISSUE DATE. The term "Issue Date" shall mean the date set by the Corporation as the issue date. JUNIOR STOCK. The term "Junior Stock" shall mean the Common Stock and any other class or series of stock of the Corporation issued after the Issue Date not entitled to receive any dividends in any Dividend Period unless all dividends required to have been paid or declared and set apart for payment on the $4.00 Series "A" Preferred Stock shall have been so paid or declared and set apart for payment and not entitled to receive any assets upon the liquidation, dissolution or winding up of the affairs of the Corporation until the $4.00 Series "A" Preferred Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. LIQUIDATION PRICE. The term "Liquidation Price" shall mean $4.00 per full share of $4.00 Series "A" Preferred Stock. PARITY STOCK. The term "Parity Stock" shall mean any other class or series of stock of the Corporation issued after the Issue Date entitled to receive payment of dividends on a parity with the $4.00 Series "A" Preferred Stock and entitled to receive assets upon the liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the $4.00 Series "A" Preferred Stock. PREFERRED STOCK. The term "Preferred Stock" shall mean the $4.00 Series "A" Preferred Stock, $0.001 par value of this Corporation. RECORD DATE. The term "Record Date" shall mean, with respect to dividends payable on Dividend Payment Dates, the date fixed by the Board of Directors for purposes of determining the holders of outstanding $4.00 Series "A" Preferred Stock entitled to the payment of dividends, not exceeding 45 days nor less than 10 days preceding each such Dividend Payment Date. 2 SENIOR STOCK. The term "Senior Stock" shall mean any class or series of stock, if any, of the Corporation issued after the Issue Date ranking senior to the $4.00 Series "A" Preferred Stock in respect of the right to receive dividends, and in respect of the right to receive assets upon the liquidation, dissolution or winding up of the affairs of the Corporation. SUBSIDIARY. The term "Subsidiary" shall mean any corporation of which shares of stock possessing at least a majority of the general voting power in electing the board of directors are, at the time as of which any determination is being made, owned by the Corporation, whether directly or indirectly through one or more Subsidiaries. 2. DIVIDENDS. (a) Subject to the prior preferences and other rights of any Senior Stock, the holders of $4.00 Series "A" Preferred Stock shall be entitled to receive, out of common shares legally available for that purpose, dividends at the rate of $.20 per share per annum, payable in common stock, pursuant to Section 2(b) below. Such dividends shall be cumulative from the Issue Date and shall be payable in arrears quarterly on March 31, June 30, September 30, and December 31, or as otherwise declared by the Board of Directors ("Dividend Payment Date"). The period between consecutive Dividend Payment Dates shall hereinafter be referred to as a "Dividend Period." Each such dividend shall be paid to the holders of record of the $4.00 Series "A" Preferred Stock as their names appear on the share register of the Corporation on the corresponding Record Date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not exceeding 50 days preceding the payment date thereof, as may be fixed by the Board of Directors. (b) The number of common shares of the Corporation that any holder of record shall be entitled to for their quarterly dividend shall equal the DIVIDEND PRICE divided by TOTAL DOLLAR DIVIDEND. TOTAL DOLLAR DIVIDEND shall be determined by multiplying the sum of $.05 times the number of $4.00 Series "A" Preferred Stock owned by the particular holder of record. DIVIDEND PRICE shall be the average closing price of common share for the twenty (20) consecutive days prior to the end of quarter date (March 31, June 30, September 30, and December 31) as reported by NASDAQ or the NASD Bulletin Board or any national stock exchange, as applicable. (c) If, on any Dividend Payment Date, the holders of the $4.00 Series "A" Preferred Stock shall not have received the full dividends provided for in the other provisions of this paragraph 2, then such dividends shall cumulate, whether or not earned or declared, with additional dividends thereon for each succeeding full Dividend Period during which such dividends shall remain unpaid. (d) So long as any shares of $4.00 Series "A" Preferred Stock shall be outstanding, the Corporation shall not declare or pay on any Junior Stock any dividend whatsoever, whether in cash, property or otherwise (other than dividends payable in shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Junior Stock other than Common Stock, together with cash in lieu of fractional shares), nor shall the Corporation 3 make any distribution on any Junior Stock, nor shall any Junior Stock be purchased or redeemed by the Corporation or any Subsidiary, nor shall any monies be paid or made available for a sinking fund for the purchase of redemption of any Junior Stock, unless all dividends to which the holders of $4.00 Series "A" Preferred Stock shall have been entitled for all previous Dividend Periods shall have been paid or declared and a sum of money sufficient for the payment thereof set apart. (e) No fractional shares of common stock shall be issued for payment of any of the aforementioned dividends. Instead of any fractional shares of common stock which would otherwise be payable as a stock dividend, the Corporation shall pay a cash adjustment in respect of such fractional interest in the amount equal to the fractional interest of the then current market price, as determined by subparagraph 5(f) below. 3. DISTRIBUTIONS UPON LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation, subject to the prior preferences and other rights of any Senior Stock, but before any distribution or payment shall be made to the holders of Junior Stock, the holders of the $4.00 Series "A" Preferred Stock shall be entitled to be paid $4.00 per share for all outstanding shares of $4.00 Series "A" Preferred Stock as of the date of such liquidation or dissolution or other winding up, plus any accrued and unpaid dividends thereon to such date, and no more, in cash or in property taken at its fair value as determined by the Board of Directors. If such payment shall have been made in full to the holders of the $4.00 Series "A" Preferred Stock, and if payment shall have been made in full to the holders of any Senior Stock and Parity Stock of all amounts to which such holders shall be entitled, the remaining assets and funds of the Corporation shall be distributed among the holders of Junior Stock, according to their respective shares and priorities. If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation, the net assets of the Corporation distributable among the holders of all outstanding shares of the $4.00 Series "A" Preferred Stock and of any Parity Stock shall be insufficient to permit the payment in full to such holders of the preferential amounts to which they are entitled, then the entire net assets of the Corporation remaining after the distributions to holders of any Senior Stock of the full amounts to which they may be entitled shall be distributed among the holders of the $4.00 Series "A" Preferred Stock and of any Parity Stock ratably in proportion to the full amounts to which they would otherwise be respectively entitled. Neither the consolidation or merger of the Corporation into or with another corporation, nor the sale of all or substantially all of the assets of the Corporation to another corporation or corporations shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph 3. 4. CONVERSION RIGHTS. The $4.00 Series "A" Preferred Stock shall be convertible into Common Stock as follows: (a) CONVERSION. Subject to and upon compliance with the provisions of this paragraph 4, the holder of any shares of $4.00 Series "A" Preferred Stock shall have the right, at such holder's option, at any time or from time to time to convert any of such shares of $4.00 Series "A" Preferred Stock into fully paid and non-assessable shares of Common Stock at a ratio of one Common Share for every $4.00 Series "A" Preferred Shares, assuming an original conversion price of $4.00 per 4 common share, subject to adjustment in subparagraph 4(f). (b) CONVERSION PRICE. Each conversion into common shares of the Company shall be at $4.00 per share with an agreed value of $4.00 per share of Preferred Stock. The Conversion Price may be subject to adjustment as set forth in subparagraph 4(f). No payment or adjustment shall be made for any dividends on the Common Stock issuable upon such conversion. (c) OPTIONAL CONVERSION. In the event, at any time, the common shares of the Company shall have a closing price, as reported by NASDAQ or the NASD Bulletin Board or any national stock exchange, as applicable, of less than $4.00 per share for twenty (20) consecutive days, the holder of any shares of $4.00 Series "A" Preferred Stock shall have the right, at such holder's option, to convert any of such $4.00 Series "A" Preferred Stock into fully paid and non- assessable shares of common stock at a 20% discount to the five (5) day average closing price, as reported by NASDAQ or the NASD Bulletin Board or any national stock exchange, as applicable, prior to the date of conversion, with an agreed upon value of $4.00 per share of preferred stock. This optional conversion right shall expire thirty (30) days after the date that the common shares of the Corporation have ceased to trade for less than $4.00 per share for twenty (20) consecutive days. (d) MECHANICS OF CONVERSION. The holder of any shares of $4.00 Series "A" Preferred Stock may exercise the conversion right specified in subparagraph 4(a) or 4(c) by surrendering to the Corporation or any transfer agent of the Corporation the certificate or certificates for the shares to be converted, accompanied by written notice specifying the number of shares to be converted. Conversion shall be deemed to have been effected on the date when delivery of notice of an election to convert and certificates for shares is made and such date is referred to herein as the "Conversion Date." As promptly as practicable thereafter and after surrender of the certificate or certificates representing shares of $4.00 Series "A" Preferred Stock to the Corporation or any transfer agent of the Corporation, the Corporation shall issue and deliver to or upon the written order of such holder a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash with respect to any fractional interest in a share of Common Stock as provided in subparagraph 4(e). The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a holder of record of such Common Stock on the applicable Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of $4.00 Series "A" Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of $4.00 Series "A" Preferred Stock representing the unconverted portion of the certificate so surrendered. (e) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of shares of $4.00 Series "A" Preferred Stock. The number of full shares of Common stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of $4.00 Series "A" Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of $4.00 Series "A" Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional 5 interest in an amount equal to that fractional interest of then Current Market Price, as determined by subparagraph 4(f) below. (f) CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to adjustments from time to time as follows: (i) Common Stock Issued at Less Than the Conversion Price. If the Corporation shall issue any Common Stock without consideration or for a consideration per share less than $4.00 per share, the Conversion Price in effect immediately prior to each such issuance shall immediately (except as provided below) be reduced to the price determined by dividing (1) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the Conversion Price in effect immediately prior to such issuance and (B) the consideration, if any, received by the Corporation upon such issuance, by (2) the total number of shares of Common Stock outstanding immediately after such issuance. In the case of the issuance of Common Stock for cash, the amount of the consideration received by the Corporation shall be deemed to be the amount of the cash proceeds received by the Corporation for such Common Stock before deducting therefrom any discounts, commissions, taxes or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (ii) Stock Dividends, Subdivisions, Reclassifications or Combinations. If the Corporation shall (i) declare a dividend or make a distribution on its Common Stock in shares of its Common Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares or (iii) combine or reclassify the outstanding Common Stock into a smaller number of shares, the Conversion Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any shares of $4.00 Series "A" Preferred Stock surrendered for conversion after such date be entitled to receive the number of shares of Common Stock which he would have owned or been entitled to receive had such $4.00 Series "A" Preferred Stock been converted immediately prior to such date. Successive adjustments in the Conversion Price shall be made whenever any event specified above shall occur. (iii) Consolidation, Merger, Sale, Lease or Conveyance. In case of any consolidation with or merger of the Corporation with or into another corporation, or in case of any sales, lease or conveyance to another corporation of the assets of the Corporation as an entirety or substantially as an entirety, each share of $4.00 Series "A" Preferred Stock shall after the date of such consolidation, merger, sale, lease or conveyance be convertible into the number of shares of stock or other securities or property (including cash) to which the Common Stock issuable (at the time of such consolidation, merger, sale, lease or conveyance) upon conversion of such share of 6 $4.00 Series "A" Preferred Stock would have been entitled to receive had he or she converted immediately prior to the occurrence of such consolidation, merger, sale, lease or conveyance. (iv) Rounding of Calculations; Minimum Adjustment. All calculations under this subparagraph (e) shall be made to the nearest cent or to the nearest one hundredth (1/100th) of a share, as the case may be. Any provision of this paragraph 4 to the contrary notwithstanding, no adjustment in the Conversion Price shall be made if the amount of such adjustment would be less than $0.05, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.05 or more. (v) Timing of Issuance of Additional Common Stock Upon Certain Adjustments. In any case in which the provisions of this subparagraph (f) shall require than an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any share of $4.00 Series "A" Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of a fractional share of Common Stock pursuant to subparagraph (d) of this paragraph 4; provided that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, and such cash, upon the occurrence of the event requiring such adjustment. (G) Current Market Price. The Current Market Price at any date shall mean, in the event the Common Stock is publicly traded, the average of the daily closing prices per share of Common Stock for twenty (20) consecutive trading days ending no more than five business days before such date (as adjusted for any stock dividend, split, combination or reclassification that took effect during such twenty (20) business day period). The closing price for each day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the last closing bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the closing sale price for such day reported by NASDAQ, if the Common Stock is traded over-the-counter and quoted in the National Market System, or if the Common Stock is so traded, but not so quoted, the average of the closing reported bid and asked prices of the Common Stock as reported by NASDAQ or any comparable system or, if the Common Stock is not listed on NASDAQ or any comparable system, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. If the Common Stock is not traded in such manner that the quotations referred to above are available for the period 7 required hereunder, Current Market Price per share of Common Stock shall be deemed to be the fair value as determined by the Board of Directors, in its sole discretion, irrespective of any accounting treatment. (h) Statement Regarding Adjustments. Whenever the Conversion Price shall be adjusted as provided in subparagraph 4(e), the Corporation shall forthwith file, at the office of any transfer agent for the $4.00 Series "A" Preferred Stock and at the principal office of the Corporation, a statement showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment, and the Corporation shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each holder of shares of $4.00 Series "A" Preferred Stock at its address appearing on the Corporation's records. Each such statement shall be signed by the Corporation's independent public accountants, if applicable, or the Corporation's officers responsible for preparing such information. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of subparagraph 4(h). (i) Notice to Holders. In the event the Corporation shall propose to take any action of the type described in clause (i) of subparagraph 4(e), the Corporation shall give notice to each holder of shares of $4.00 Series "A" Preferred Stock, in the manner set forth in subparagraph 4(g), which notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable upon conversion of shares of $4.00 Series "A" Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least 10 days prior to the date so fixed, and in case of all other action, such notice shall be given at least 15 days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. (j) Treasury Stock. For the purpose of this paragraph 4, the sale or other disposition of any Common Stock theretofore held in the Corporation's treasury shall be deemed to be an issuance thereof. (k) Costs. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of $4.00 Series "A" Preferred Stock; provided that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of $4.00 Series "A" Preferred Stock in respect of which such shares are being issued. (l) Reservation of Shares. The Corporation shall reserve at all times so long as any shares of $4.00 Series "A" Preferred Stock remain outstanding, free from preemptive rights, out of its treasury stock (if applicable) or its authorized but unissued shares of Common Stock, or both, solely for the purpose of effecting the conversion of the shares of $4.00 Series "A" Preferred Stock, 8 sufficient shares of Common Stock to provide for the conversion of all outstanding shares of $4.00 Series "A" Preferred Stock. (m) Approvals. If any shares of Common Stock to be reserved for the purpose of conversion of shares of $4.00 Series "A" Preferred Stock require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon conversion, then the Corporation will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. If, and so long as, any Common Stock into which the shares of $4.00 Series "A" Preferred Stock are then convertible is listed on any national securities exchange, the Corporation will, if permitted by the rules of such exchange, list and keep listed on such exchange, upon official notice of issuance, all shares of such Common Stock issuable upon conversion. (n) Valid Issuance. All shares of Common Stock which may be issued upon conversion of the shares of $4.00 Series "A" Preferred Stock will upon issuance by the Corporation be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof, and the Corporation shall take no action which will cause a contrary result (including without limitation, any action which would cause the Conversion Price to be less than the par value, if any, of the Common Stock). 5. Voting Rights. The holders of the issued and outstanding shares of $4.00 Series "A" Preferred Stock shall have no voting rights except as set forth herein and as required by law; provided however that the Corporation may, without the vote or consent of any holders of the $4.00 Series "A" Preferred Stock, amend the Corporation's Articles of Incorporation or file a Certificate of Designation or similar instrument to issue $4.00 Series "A" Preferred Stock of the Corporation. 6. Exclusion of other Rights. Except as may otherwise be required by law, the shares of $4.00 Series "A" Preferred Stock shall not have any preferences or relative, participating optional or special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Corporation's Articles of Incorporation. The shares of $4.00 Series "A" Preferred Stock shall have no preemptive or subscription rights. 7. Headings of Subdivisions. The heading of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 8. Severability of Provisions. If any right, preference or limitation of the $4.00 Series "A" Preferred Stock set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other rights, preferences and limitations set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall, nevertheless, remain in full force and effect, and no right, preference or limitation set forth shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein. 9 9. Status of Reacquired Shares. Shares of $4.00 Series "A" Preferred Stock which have been issued and reacquired in any manner shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued shares of $4.00 Series "A" Preferred Stock issuable in series undesignated as to series and may be redesignated and reissued. IN WITNESS WHEREOF, Private Media Group, Inc. has caused this Certificate to be signed by its President, Alfredo M. Villa, and attested by its Secretary, Alfredo M. Villa, this ______ of January, 1998. Private Media Group, Inc. /s/ Alfredo M. Villa ------------------------------ Alfredo M. Villa, President ATTEST: By --------------------------------- Alfredo M. Villa, Secretary STATE OF UTAH ) ) ss COUNTY OF SALT LAKE ) On the _____ day of January, 1998, personally appeared before me Alfredo M. Villa, President and Secretary of Private Media Group, Inc., who, after being duly sworn did state that the matters contained above are true and correct to the best of his knowledge. - --------------------------- Notary Public 10 EX-10.1 3 MILCAP ACQUISITION AGREEMENT EXHIBIT 10.1 MILCAP ACQUISITION AGREEMENT This Acquisition Agreement is dated this 19/th/ day of December, 1997, and is executed by and among Private Media Group, Inc., a Nevada Corporation, U.S.A. (hereinafter referred to as "PRVT") and Milcap Media Limited, Cyprus, the owner of Milcap Publishing Group AB, Sweden, Milcap Media Group SL, Spain, Legolas Srl, Italy, AB Normcard, Sweden, and Private France SA, France, either directly or indirectly (hereinafter collectively referred to as "MILCAP" or individually as "subsidiaries"). WHEREAS, the parties hereto desire that PRVT acquire all of the issued and outstanding stock and ownership of Milcap Media Limited in exchange for stock in PRVT; and WHEREAS, the parties hereto desire to set forth certain representations, warranties and covenants made by each to the others as an inducement to the transaction; and WHEREAS, the parties hereto intend that this transaction qualify as a tax- free reorganization under Section 368 of the U.S. Internal Revenue Code of 1954, as amended, and related provisions thereunder or another applicable section; NOW, THEREFORE, in consideration of the premises of the mutual representations, warranties and covenants herein contained, the parties hereby agree as follows: ARTICLE I. EXCHANGE PRVT and MILCAP agree and acknowledge as follows: (a) SHARE OF MILCAP. Subject to the terms and conditions herein, on or before January 30, 1998, MILCAP will have used its best effort to cause shareholders of MILCAP holding its outstanding shares to endorse and deliver to an escrow agent, selected by MILCAP, their shares. (b) SHARES OF PRVT. On or before January 30, 1998, PRVT shall issue and deliver to the escrow agent, 7,000,000 new Convertible Preferred Shares, as described below, and 175,000 common stock purchase warrants as described below (collectively the "PRVT Securities"). On the Final Closing Date (defined below), the Escrow Agent shall deliver the MILCAP shares to PRVT and shall deliver the PRVT Securities to the shareholders of MILCAP (collectively, the "Stock Exchange"). (c) DESCRIPTION OF PREFERRED SHARES. Each share of the newly designated Preferred shares to be issued pursuant to this agreement shall be designated as $4.00 Series A Convertible Preferred stock, and shall provide for a 5% annual stock dividend to be paid quarterly in common shares, at the average closing price of common shares for the twenty 1 (20) consecutive days prior to the quarterly record date, as reported by NASDAQ or NASD BB. Each preferred share shall be convertible at any time into common shares, on a one for one basis and, in addition, at any time the common stock of PRVT has a closing price, as reported by NASDAQ or NASD BB, of less than $4.00 per share for twenty (20) consecutive days, the preferred stock may be converted, at the option of the holder thereof, into common stock at a 20% discount to the five (5) day average closing price, as reported by NASDAQ or NASD BB, prior to the date of conversion. The preferred stock shall be substantially in the form agreed upon by the parties before January 30, 1998. (c) DESCRIPTION OF COMMON STOCK WARRANTS. Each of the common stock warrants to be issued pursuant to the terms of this Agreement shall be exercisable at any time between the date of issue and December 31, 2000, shall have an exercise price of $4.00 per share, and shall be in the form agreed upon by the parties before January 30, 1998. ARTICLE II. REPRESENTATIONS AND COVENANTS OF MILCAP MILCAP represents and warrants to PRVT, at the date and on the Interim Closing Date (defined below) and the Final Closing Date (defined below) as follows: (a) ORGANIZATION. Milcap Media Limited, Cyprus, and each of the directly or indirectly wholly owned subsidiaries is duly organized and validly existing in good standing under the laws of the country of each company and, it is duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted. (b) CAPITALIZATION. The authorized and the issued capital stock of MILCAP is listed on Exhibit I hereto and Exhibit II hereto contains a complete and accurate list of all of the Shareholders and the number of shares held by each free and clear of all liens, encumbrances and claims of every kind. Each share is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of the preemptive rights of any shareholder. All options, warrants, calls or commitments of any kind, if any, obligations if any of MILCAP, to issue any of its capital stock, are listed on Exhibit I hereto. (c) FINANCIAL STATEMENTS. MILCAP shall deliver to PRVT, on or before January 30, 1998 consolidated audited financial statements through December 31, 1996 and consolidated unaudited financial statements for the nine months ending September 30, 1997. Except as and only to the extent expressly disclosed, such consolidated financial statements will have been prepared in accordance with generally accepted accounting principles in the country of each company, applied on a consistent basis throughout the periods indicated and will present fairly the financial condition of MILCAP and its subsidiaries. (d) PERMITS. MILCAP shall deliver to PRVT, on or before January 30, 1998, an accurate list and summary description of all permits, licenses, franchises, certificates, trademarks, trade 2 names, patents, patent applications and copyrights of a material nature owned or held by MILCAP and its subsidiaries. (e) CONTRACTS. MILCAP shall deliver to PRVT, on or before January 30, 1998, a complete list of all material contracts and agreements to which MILCAP and its subsidiaries are a party or by which it or any of its property is bound. (f) BANKS. MILCAP shall deliver to PRVT, on or before January 30, 1998, an accurate list showing, as of the Closing Date: (1) the name of each bank, broker, or other financial institution with which MILCAP and its subsidiaries have accounts or safe deposit boxes; and (2) the names in which the accounts or boxes are held; and (3) the names of each person authorized to draw thereon or have access thereto. (g) VIOLATIONS, SUITS, ETC. MILCAP shall deliver to PRVT, on or before January 30, 1998, an accurate complete list of all claims, actions, suits or proceedings instituted, filed, or threatened presently against or affecting MILCAP and its subsidiaries, at law or in equity, or before or by any state, municipal or other governmental department or court, commission, board, bureau, agency or instrumentality wherever located, if any. (h) TITLE. MILCAP warrants that it has good and marketable title to all properties, assets and leasehold estates, real and personal, owned and used in its business, and which is material to the operation of that business, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (A) liens for current taxes and assessments not in default; and (B) liens arising by operation of law of which MILCAP and its subsidiaries have no knowledge of any such liens existing. (i) EXECUTION OF AGREEMENT. To the knowledge and belief of MILCAP, the execution of this Agreement will not violate or breach any agreement, contract, or commitment to which MILCAP and its subsidiaries are a party. MILCAP is duly authorized to execute this Agreement and all actions required by law and agreements, charters and bylaws to properly and legally execute this Agreement have been taken. (j) TAXES. MILCAP warrants, that at the time of closing, MILCAP and its subsidiaries will not have any outstanding due and payable tax liability, whatsoever, including, without limiting the generality of the foregoing, national or state corporate tax. ARTICLE III. OBLIGATIONS OF MILCAP AND THE SHAREHOLDERS PRIOR TO CLOSING MILCAP hereby covenants, warrants and agrees that between the date of this Agreement and 3 the Final Closing Date, or the termination of this Agreement, whichever occurs first: (1) It will afford to the Officers and authorized representatives of PRVT access to the plants, properties, books and records of MILCAP and it will furnish to PRVT such additional financial and operating data and other information as to the business and properties of MILCAP as PRVT may from time to time reasonably request. (2) It will cooperate with PRVT, its representatives and counsel in the preparation of any documents or other material which may be required by any governmental agency. PRVT will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential (except such information as PRVT may be required to disclose to any governmental agency or to provide current information to the public, its shareholders, or its market makers) and will not use, and will not knowingly permit others to use, any such information in a manner detrimental to MILCAP or the Shareholders or in violation of any federal or state statute. (3) MILCAP and its subsidiaries will: (a) carry on their business in substantially the same manner as it presently does; and (b) maintain their properties and facilities in as good working order and condition as at present, ordinary wear and tear excepted; and (c) perform all of their material obligations under agreements relating to or affecting their assets, properties and rights, if any; and (d) keep in full force and effect present insurance policies or other comparable insurance coverage, if any; and (4) MILCAP and its subsidiaries will not, without the prior written consent of PRVT: (a) make any change in their Articles of Incorporation; or (b) issue any securities, which, however, shall not prevent MILCAP from issuing new share certificates in exchange for old share certificates due to changes among the Shareholders prior to the Final Closing Date; or (c) declare or pay any dividend or make any distribution in respect of their stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of their stock; or 4 (d) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures except in the normal course of business; or (e) increase the compensation payable or to become payable to any Officer, employee or agent, or make any bonus payment to any such person; or (f) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired; or (g) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; or (h) merge or consolidate or agree to merge or consolidate with or into any other corporation. ARTICLE IV. REPRESENTATIONS AND COVENANTS OF PRVT PRVT represents and warrants to MILCAP at the date hereof and on the Interim Closing Date and the Final Closing Date as follows: (a) ORGANIZATION. PRVT is a corporation duly organized and validly existing in good standing under the laws of the State of Nevada, and it is duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted. The character and location of the assets now owned or regularly leased by PRVT in the conduct of its business and the nature of the business as now transacted by it does not require qualification as a foreign corporation in any jurisdiction. (b) CAPITALIZATION. The authorized capital stock PRVT consists solely of 50,000,000 shares of common stock with a par value of $.001 per share, of which 543,668 shares are issued and outstanding at 10,000,000 shares of Preferred stock with a par value of $.001 per share, none of which are outstanding. Each share of stock of PRVT is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of the preemptive rights of any Shareholder. No option, warrant, call or commitment of any kind obligating PRVT to issue any of its capital stock exists, except as indicated on Exhibit III hereto. PRVT represents and warrants that the holders of the 38,000 common stock warrants will exercise these warrants on or prior to March 3, 1998 at a price of not less than $4 per share. (c) FINANCIAL STATEMENTS. PRVT shall deliver to MILCAP, on or before January30, 5 1998, copies of the following financial statements of PRVT. Audited Financial Statements for the fiscal years ending March 31, 1997, 1996, 1995, 1994, 1993, 1992 and unaudited financial statements through October 31, 1997. Except as and only to the extent expressly disclosed on a statement signed by the preparer of such financial statements, such financial statements will have been prepared in accordance with generally accepted accounting principles, applied on consistent bases throughout the periods indicated and will present fairly the financial condition of PRVT as of the dates indicated thereon. (d) ACCOUNT RECEIVABLES. PRVT shall deliver to MILCAP, on or before January 30, 1998, an accurate list as of the most recent Balance Sheet Date of the accounts and notes receivable of PRVT, if any. (e) PERMITS. PRVT shall deliver to MILCAP, on or before January 30, 1998, an accurate list and summary description as of the most recent Balance Sheet Date of all permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights of a material nature owned or held by PRVT, if any. (f) CONTRACTS. PRVT shall deliver to MILCAP, on or before January 30, 1998, an accurate complete list as of the most recent Balance Sheet Date of all material contracts and agreements to which PRVT is a party or by which it or any of its property is bound, if any. (g) EMPLOYEE BENEFITS. PRVT shall deliver to MILCAP, on or before January 30, 1998, an accurate complete list from its inception or from the inception of any predecessor of pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plans or arrangements, if any. (h) BANKS. PRVT shall deliver to MILCAP, on or before January 30, 1998, an accurate list showing, as of the Closing Date: (1) the name of each bank, broker, or other financial institution with which PRVT has accounts or safe deposit boxes; and (2) the names in which the accounts or boxes are held; and (3) the names of each person authorized to draw thereon or have access thereto. (i) VIOLATIONS, SUITS, ETC. PRVT shall deliver to MILCAP, on or before January 30, 1998, an accurate complete list of all claims, actions, suits or proceedings instituted, filed, or threatened presently against or affecting PRVT, at law or in equity, or before or by any federal, state, municipal or other governmental department or court, commission, board, bureau, agency or instrumentality wherever located, if any. To the best of the knowledge of PRVT there are no actions, suits, proceedings pending against PRVT which could involve the possibility of any materially adverse judgment or ruling against or liability of PRVT which could affect the assets or the business of PRVT. 6 (j) TITLE. To the knowledge and belief of PRVT, PRVT has good and marketable title to all properties, assets and leasehold estates, real and personal, owned and used in its business, and which is material to the operation of that business, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (A) liens for current taxes and assessments not in default; and (B) lien arising by operation of law of which PRVT has no knowledge of any such liens existing. (k) EXECUTION OF AGREEMENT. To the knowledge and belief of PRVT, the execution of this Agreement will not violate or breach any agreement, contract, or commitment to which PRVT is a party. The Officers of PRVT are duly authorized to execute this Agreement and have taken all action required by law and agreements, charters and bylaws to properly and legally execute this Agreement. (l) TAXES. PRVT warrants, that at the time of closing, PRVT will not have any outstanding due and payable tax liability, whatsoever, including, without limiting the generality of the foregoing, federal, national, or state corporate tax. (m) NO MATERIAL CHANGE. There has been no material adverse change in the financial condition, business or properties of PRVT since October 31, 1997. (n) NO UNDISCLOSED LIABILITIES. PRVT does not have any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which were not fully reflected or reserved against in the October 31, 1997 Balance Sheet or PRVT, except for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since October 31, 1997 which do not exceed $25,000 in total. (o) FULL DISCLOSURE. No representation or warranty made by PRVT in this Agreement or in any exhibit or schedule delivered by PRVT to CINECRAFT pursuant hereto, contains or will contain an untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. (p) BOARD OF DIRECTORS. The entire Board of Directors of PRVT constitutes one director, Mr. Alfredo Villa. The size of the Board shall not be increased during the term of this Agreement, except pursuant to this Agreement or the Cinecraft Agreement. ARTICLE V. OBLIGATIONS OF PRVT PRIOR TO CLOSING PRVT hereby covenants, warrants and agrees that between the date of this Agreement and the Final Closing Date or the termination of this Agreement, whichever occurs first: (1) It will afford to the Officers and authorized representatives of MILCAP access to the plants, properties, books and records of PRVT and will furnish to MILCAP 7 such additional financial and operating data and other information as to the business and properties of PRVT as MILCAP may from time to time reasonably request. (2) It will cooperate with MILCAP, its representatives and counsel in the preparation of any documents or other material which may be required by any governmental agency. MILCAP will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential (except such information as MILCAP may be required to disclose to any governmental agency) and will not use, and will not knowingly permit others to use, any such information in a manner detrimental to PRVT or in violation of any federal or state statute. (3) PRVT will: (a) carry on its business in substantially the same manner as prior to this agreement; and (b) maintain its properties and facilities in as good working order and condition as at present, ordinary wear and tear excepted; and (c) perform all of its material obligations under agreements relating to or affecting its assets, properties and rights, if any; and (d) keep in full force and effect present insurance policies or other comparable insurance coverage, if any; and (4) PRVT shall not, without the prior written consent of MILCAP: (a) make any change in its Articles of Incorporation; or (b) issue any securities, except as is provided for in Exhibit E; or (c) issue any securities, except as contemplated in the Acquisition Agreement with CINECRAFT (d) declare or pay any dividend or make any distribution in respect of their stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of their stock; or (e) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures except in the normal course of business; or (f) increase the compensation payable or to become payable to any 8 Officer, employee or agent, or make any bonus payment to any such person; or (g) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired; or (h) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; or (i) merge or consolidate or agree to merge or consolidate with or into any other corporation, except for whatever will be contemplated in the Acquisition Agreement with CINECRAFT ARTICLE VI. OBLIGATIONS OF BOTH PARTIES PRIOR (a) SHAREHOLDERS MEETING. If required by law or determinated advisable by legal counsel, either or both of the parties hereto shall, as soon as practical after the signing of this Agreement, call a shareholders meeting of the party and recommend all matters necessary to consummate the acquisition contemplated by and between the parties. (b) BEST EFFORTS. Subject to Article IX, the parties will use their reasonable best efforts to cooperate in all manners necessary to consummate the transaction contemplated herein on a timely basis. (c) EXCLUSIVITY. During the term of this Agreement, neither PRVT nor MILCAP will enter into or continue negotiations with any third party for the sale of the stock and assets of either party, nor any other negotiations that might or would conflict or otherwise affect this Agreement, except for whatever will be contemplated in the Acquisition Agreement with CINECRAFT. (d) DISCLOSURE OF INFORMATION. The data and information coming into the possession of any party to this Agreement which is otherwise not publicly known shall be deemed strictly confidential and shall not be disclosed to any third person, whether orally or in writing, including the media, without the prior written consent of the parties to this Agreement. This prohibition shall not prevent any party to this Agreement from making such disclosures as are required by virtue of any law to which it is subject or by any regulatory bodies having jurisdiction and specifically does not apply to news releases that any party is required to make. A copy of a news release that contains information about the intentions set out herein shall be provided to all parties at least three (3) business days prior to the issue of the news release. Notwithstanding anything to the contrary contained herein, PRVT shall not issue any press releases without the prior approval of MILCAP. Nothing in this paragraph shall prevent a party from furnishing to any entity with which it is in good 9 faith negotiating in furtherance of its obligations contemplated herein, such information as may reasonably be required by such entity. ARTICLE VII. SECURITIES LAWS AND RESALE OF SHARES (a) UNDERWRITER STATUS. The Shareholders of MILCAP have been informed that they may be deemed to be "underwriters" under the Securities Act of 1933 (hereinafter the "Securities Act"), and are required to comply with the requirements of the Securities Act, the Securities Exchange Act of 1934 (hereinafter the "Exchange Act"), various rules and regulations of the Securities and Exchange Commission (hereinafter the "Commission") and state securities laws in connection with any offer or transfer of the stock of PRVT. PRVT has no obligation under the securities laws or under this Agreement to register the stock of the surviving company or to register the shares of stock of PRVT to be delivered pursuant to this Agreement with any state or federal agency or to provide a prospectus for any offer or transfer thereof by the Shareholders, except as set forth in Article VIII below. (b) SECURITIES ACT RESTRICTIVE LEGEND. Until registration, each preferred certificate representing stock of PRVT issue pursuant to this Agreement shall be imprinted with a legend in substantially the following form: These securities have not been registered with the Securities and Exchange Commission under the Securities Act of 1933 and have been sold in reliance upon the exemption from registration contained in Section 4(2) of such Act. The offer and transfer of the shares represented by this certificate are subject to compliance with the Securities Act of 1933, the Securities Exchange Act of 1934, rules and regulations of the Securities and Exchange Commission and state securities laws, rules and regulations, and no transfer of the shares represented by this certificate shall be valid or effective unless made in accordance therewith. ARTICLE VIII. REGISTRATION OF SHARES AND NASDAQ LISTING (a) REGISTRATION OF COMMON SHARES OF PRVT. PRVT will use its best efforts to take all necessary actions to ensure the registration (the "Exchange Act Registration") of the common shares of PRVT under the U.S. Securities Exchange Act of 1934, said registration to become effective as soon as possible after the Interim Closing Date, to ensure that PRVT will become a fully reporting company, as said term is generally known under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). (b) NASDAQ LISTING. Contemporaneously with registration of the shares of PRVT under the Exchange Act, PRVT will use its best efforts to ensure the listing of the PRVT shares on the NASDAQ Small Cap Market or, if appropriate, the NASDAQ National Market System. 10 (c) COOPERATION OF PARTIES. Both parties recognize that the aforementioned registrations will require that the parties provide for such registration substantial information about the operations of the parties, the history of the parties, the identity of officers and directors and audited financial statements prepared in accordance with U.S. requirements. The parties agree to cooperate in all manners necessary to provide the information to cause the aforementioned registrations to be completed. (d) PREPARATION OF DOCUMENTS. The preparation and filing of PRVT of all necessary registration documents and filing with the U.S. federal and state securities authorities in order to effect the Exchange Act Registration and the Securities Act Registration and the preparation and filing with NASDAQ of the Listing Application shall be performed by counsel and independent public accountants chosen by MILCAP and agreed by PRVT under MILCAP's supervision at PRVT's expense will the full cooperation of the officers, directors, attorneys and independent public accountants of PRVT and MILCAP. ARTICLE IX. CONDITIONS PRECEDENT AND RIGHT OF TERMINATION (a) CONDITIONS PRECEDENT TO CLOSING. Unless this Agreement shall be earlier terminated in accordance with the terms hereof, the closing of the Stock Exchange and the release of shares from escrow shall take place within 10 days following the date (the "Final Closing Date") on which all of the following have been satisfied: 1. The parties shall have entered into a mutually satisfactory escrow agreement, in accordance with the terms of this Agreement with an escrow agent selected by MILCAP. 2. PRVT shall have issued and delivered the PRVT Securities to the escrow agent by January 30, 1998. 3. Shareholders of MILCAP owning at least 80% of the issued and outstanding shares of MILCAP shall have delivered such shares of the escrow agent by January 30, 1998. 4. That each certificate of PRVT be issued pursuant to Section 4(2) of the Securities Act and shall contain the restrictive legend as indicated in Article VI herein, until such time as they are registered under the Securities Act. 5. Each shareholder of MILCAP that has delivered shares to the escrow agent agrees that their shares and the PRVT shares to be issued to them shall be held in escrow until such time as the right of termination contained in (b) and (d) below has passed. 6. PRVT shall have filed a registration statement Form 10 to register as a public company under the Exchange Act and the Securities and Exchange Commission 11 ("SEC") shall have completed its review of such registration statement on a satisfactory basis. 7. PRVT shall have filed a registration statement with the SEC under the Securities Act for the sale by the shareholders of CINECRAFT of the 4,000,000 shares of Common Stock and such registration statement shall have been declared effective by the SEC. 8. The shares of Common Stock of PRVT shall have been approved for listing on either the NASDAQ Small Cap or National Market Systems. (b) RIGHT OF TERMINATION OF MILCAP. MILCAP shall have the unilateral right to terminate all transactions contemplated under this Agreement, for whatever reason it deems appropriate or for no reason, at any time prior to the effective date (the "Listing Date") of the NASDAQ listing, by giving written notice to PRVT. From and after the Listing Date, this right of termination shall expire and be of no further force or effect. (c) PENALTY IN THE EVENT OF MILCAP TERMINATION. In the event hat MILCAP terminates the transactions contemplated by this Agreement pursuant to subparagraph (b) above, the only penalty suffered by MILCAP will be a requirement to reimburse PRVT for all reasonable direct costs, including legal and accounting, which PRVT has incurred in connection with the Exchange Act Registration, the Securities Act Registration and the NASDAQ Listing up to a maximum of $100,000; provided that CINECRAFT shall not be required to reimburse PRVT for any such expenses if PRVT shall have breached any of its representations, warranties and covenant contained herein. (d) RIGHT OF TERMINATION OF PRVT. For so long as MILCAP is proceeding in good faith pursuant to Article VIII hereof to effect the Exchange Act Registration , the Securities Act Registration and the NASDAQ Listing, PRVT shall not have the right to terminate this Agreement unless such registrations and listing shall not have been completed by June 30, 1998. Thereafter, PRVT shall have the unilateral right to terminate all transactions contemplated under this Agreement, for whatever reason it deems appropriate at any time prior to the Listing Date, by giving written notice to MILCAP. From and after the Listing Date, this right of termination shall expire and be of no further force or effect. (e) PENALTY IN THE EVENT OF PRVT TERMINATION. In the event that PRVT terminates the transactions contemplated by this Agreement pursuant to subparagraph (d) above, the only penalty suffered by PRVT will be its responsibility for all reasonable direct costs, including legal and accounting, which MILCAP has incurred in connection with the Exchange Act Registration, the Securities Act Registration and the NASDAQ Listing up to a maximum of $100,000; provided that PRVT shall not be required to reimburse MILCAP for any such expense if MILCAP shall have breached any of its representations, warranties and covenants contained herein. (f) NO OTHER PENALTIES. In the event of a termination by either party under the terms of 12 this section, the only penalties, rights to reimbursement, damages, or claims that either party may have against the other shall be limited to the penalties contained in this section. (g) Each of the parties hereto will provide the other party with monthly written expense reports, which set forth any expenses for which such party intends to seek reimbursement under this Article IX. (h) Upon the termination of this Agreement, the escrow shall return the deposited securities to the party depositing the same. ARTICLE X. BOARD OF DIRECTORS OF PRVT (a) APPOINTMENT. On or any time after the Closing Date, MILCAP is entitled to appoint one of the Directors to the Board of Directors of PRVT. (b) RESIGNATION. In the event that MILCAP or PRVT terminates the transactions contemplated by this Agreement, the Director appointed pursuant to subparagraph (a) above, will automatically resign from his position. ARTICLE XI. EFFECTIVENESS, CLOSING, ESCROW AGENT (a) BINDING EFFECT. This Agreement shall be binding and effective as to all parties hereto upon the signing of this Agreement by PRVT and MILCAP. (b) CLOSING DATES. For the purpose of this Agreement, the Interim Closing Date shall be that date upon which the escrow agent has in it possession the shares and other consideration contained in Article I, paragraphs (a) and (b) herein. The "Final Closing Date" shall be the date on which all of the conditions set forth in Article IX (a) have been satisfied. (c) ESCROW AGENT. The parties agree that they shall enter into an escrow agreement before January 30, 1998 to hold the PRVT and MILCAP preferred shares and warrants subject to the terms of this Agreement. Any and all escrow expenses shall be shared equally between the parties. (d) FORM OF ACQUISITION. Because of the complexity of this acquisition, the parties acknowledge that the exact form and structure of the final acquisition will be based upon numerous legal and taxation questions which have not been determined at this time. Therefore, the parties agree that the final form and organization of this acquisition will be determined based upon the advice of legal and accounting professionals so as to maximize the benefit to all of the parties. 13 ARTICLE XII. GENERAL (a) ADDITIONAL INSTRUMENTS. The parties hereto shall deliver or cause to be delivered on the Final Closing Date, and at such other times and places as shall be reasonably agreed on, such additional instruments as any party may reasonably request for the purpose of carrying out this Agreement. PRVT and MILCAP will cooperate and use their reasonable best efforts to have the present Officers, Directors and employees of PRVT and MILCAP cooperate on and after the Final Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Final Closing Date. (b) ASSIGNMENT. This Agreement and the rights of PRVT and MILCAP hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, and the successors of and the heirs and legal representatives of the parties hereto. (c) ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding between the parties hereto and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement may be modified or amended only by a duly authorized written instrument executed by the parties hereto. (d) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. It shall not be necessary that any single counterpart hereof be executed by all parties hereto so long as at least one counterpart is executed by each party. (e) SURVIVORSHIP. All warranties, covenants, representations and guarantees shall survive the closing and execution of the documents contemplated by this Agreement. The parties hereto in executing, and in carrying out the provisions of this Agreement are relying solely on the representation, warranties and agreements contained in this Agreement or in any writing delivered pursuant to provisions of this Agreement or at the closing of the transactions herein provided for and not upon any representation, warranty, agreement, promise or information, written or oral, made by any person other than as specifically set forth herein or therein. (f) FEES. Each party agrees to pay their own fees, expenses and disbursements to their agents, representatives, accountants and counseling incurred in connection with the subject matter of this Agreement and any amendments thereto subject only to any other provisions of this Agreement. 14 (g) REQUIREMENTS OF NOTICE. All requirements for notice contained herein shall be deemed effective upon delivery to the addresses of the respective parties contained herein by certified mail, courier, facsimile, or personal delivery. (h) LAW. This Agreement shall be governed and construed in accordance with the laws of the State of New York without giving effect to any choice of conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. The parties expressly consent to the personal and subject matter jurisdiction of the courts (federal and state) in New York in connection with any disputes arising out of or based upon this Agreement of the transactions contemplated hereby. (i) CINECRAFT AGREEMENT. Notwithstanding anything to the contrary contained herein, the Final Closing Date and the Stock Exchange shall not occur unless there is a simultaneous closing pursuant to that certain agreement dated the date hereof between PRVT and CINECRAFT. (j) CORPORATE NAME. Within 5 days following the termination of this Agreement, PRVT shall change its corporate name to a name other than "Private Media Group, Inc." or any other variation thereof. Thereafter, PRVT shall not use the name "Private Media Group" or any variation thereof for any corporate or trade name purposes. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. Private Media Group, Inc. By ----------------------------------------- Alfredo M. Villa, President and Secretary ON BEHALF OF THE SHAREHOLDERS OF MILCAP. Milcap Media Limited By -------------------------------------- Niamh Whelan, Director 15 EX-10.2 4 CINECRAFT ACQUISITION AGREEMENT EXHIBIT 10.2 CINECRAFT ACQUISITION AGREEMENT This Acquisition Agreement is dated this 19th day of December, 1997, and is executed by and among Private Media Group, Inc., a Nevada Corporation, U.S.A. (hereinafter referred to as "PRVT") and Cinecraft Limited, 3 Bell Lane, Gibraltar (hereinafter referred to as "CINECRAFT"). WHEREAS, the parties hereto desire that PRVT acquire all of the issued and outstanding stock and ownership of CINECRAFT in exchange for stock in PRVT; and WHEREAS, the parties hereto desire to set forth certain representations, warranties and covenants made by each to the others as an inducement to the transaction; and WHEREAS, the parties hereto intend that this transaction qualify as a tax- free reorganization under Section 368 of the U.S. Internal Revenue Code of 1954, as amended, and related provisions thereunder or another applicable section; NOW, THEREFORE, in consideration of the premises of the mutual representations, warranties and covenants herein contained, the parties hereby agree as follows: ARTICLE I. EXCHANGE PRVT and CINECRAFT agree and acknowledge as follows: (a) SHARES OF CINECRAFT. Subject to the terms and conditions herein, on or before January 30, 1998, CINECRAFT will have used its best effort to cause shareholders of CINECRAFT holding its outstanding shares to endorse and deliver to an escrow agent, selected by CINECRAFT, their shares. (b) SHARES OF PRVT. On or before January 30, 1998, PRVT shall issue and deliver to the escrow agent, 7,500,000 of its authorized but unissued $.001 par value common stock, and 700,000 common stock purchase warrants as described below (collectively the "PRVT Securities"). The aforementioned shares and warrants shall be apportioned pro rata among the shareholders of CINECRAFT. In the event that the shareholders of CINECRAFT do not tender their shares by January 30, 1998, the number of common stock and warrants to be distributed to the shareholders shall be proportionately reduced. On the Final Closing Date (defined below), the Escrow Agent shall deliver the CINECRAFT shares to PRVT and shall deliver the PRVT Securities to the Shareholders of CINECRAFT (collectively, the "Stock Exchange"). (c) DESCRIPTION OF COMMON STOCK WARRANTS. Each of the common stock warrants to be issued pursuant to the terms of this Agreement shall be exercisable at any time between 1 the date of issue and December 31, 2000, shall have an exercise price of $4.00 per share, and as further agreed by the parties. (d) RESTRICTIONS ON SHARES. All common shares of PRVT issued and delivered pursuant to this Agreement shall be subject to the restrictions described more fully in Article VII of this Agreement. ARTICLE II. REPRESENTATIONS AND COVENANTS OF CINECRAFT CINECRAFT represents and warrants to PRVT, at the date and on the Interim Closing Date (defined below) and the Final Closing Date (defined below) as follows: (a) ORGANIZATION. CINECRAFT is a Gibraltar corporation duly organized and validly existing in good standing under the laws of Gibraltar and, it is duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted. (b) CAPITALIZATION. The authorized and the issued capital stock of CINECRAFT is listed on Exhibit A hereto and Exhibit B hereto contains a complete and accurate list of all of the Shareholders and the number of shares held by each free and clear of all liens, encumbrances and claims of every kind. Each share is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of the preemptive rights of any shareholder. All options, warrants, calls or commitments of any kind, if any, obligations if any of CINECRAFT, to issue any of its capital stock, are listed on Exhibit A hereto. (c) FINANCIAL STATEMENTS. CINECRAFT shall deliver to PRVT, on or before January 30, 1998, unaudited financial statements through December 31, 1996 and unaudited financial statements for the nine months ending September 30, 1997. CINECRAFT will however try to provide audited financial statements. (d) PERMITS. CINECRAFT shall deliver to PRVT, on or before January 30, 1998, an accurate list and summary description of all permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights of a material nature owned or held by CINECRAFT. (e) CONTRACTS. CINECRAFT shall deliver to PRVT, on or before January 30, 1998, a complete list of all material contracts and agreements to which CINECRAFT is a party or by which it or any of its property is bound. (f) BANKS. CINECRAFT shall deliver to PRVT, on or before January 30, 1998, an accurate list of bank, bank accounts, safe deposit boxes and names of persons authorized to draw thereon or have access thereto, if any. 2 (g) VIOLATIONS, SUITS, ETC. CINECRAFT shall deliver to PRVT, on or before January 30, 1998, an accurate complete list of all claims, actions, suits or proceedings instituted, filed, or threatened presently against or affecting CINECRAFT, at law or in equity, or before or by any state, municipal or other governmental department or court, commission, board, bureau, agency or instrumentality wherever located, if any. (h) TITLE. CINECRAFT warrants that it has good and marketable title to all properties, assets and leasehold estates, real and personal, owned and used in its business, and which is material to the operation of that business, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (A) liens for current taxes and assessments not in default; and (B) liens arising by operation of law of which CINECRAFT has no knowledge of any such liens existing. (i) EXECUTION OF AGREEMENT. To the knowledge and belief of CINECRAFT, the execution of this Agreement will not violate or breach any agreement, contract, or commitment to which CINECRAFT is a party. CINECRAFT is duly authorized to execute this Agreement and all actions required by law and agreements, charters and bylaws to properly and legally execute this Agreement have been taken. (j) TAXES. CINECRAFT warrants, that at the time of closing, CINECRAFT will not have any outstanding due and payable tax liability, whatsoever, including, without limiting the generality of the foregoing, federal, national or state corporate tax. ARTICLE III. OBLIGATIONS OF CINECRAFT AND THE SHAREHOLDERS PRIOR TO CLOSING CINECRAFT hereby covenants, warrants and agrees that between the date of this Agreement and the Final Closing Date, or the termination of this Agreement, whichever occurs first: (1) It will afford to the Officers and authorized representatives of PRVT access to the plants, properties, books and records of CINECRAFT and it will furnish to PRVT such additional financial and operating data and other information as to the business and properties of CINECRAFT as PRVT may from time to time reasonably request. (2) It will cooperate with PRVT, its representatives and counsel in the preparation of any documents or other material which may be required by any governmental agency. PRVT will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential (except such information as PRVT may be required to disclose to any governmental agency or to provide current information to the public, its shareholders, or its market makers) and will not use, and will not knowingly permit others to use, any such information in a manner detrimental to CINECRAFT or the Shareholders or in violation of any federal or state statute. 3 (3) CINECRAF will: (a) carry on its business in substantially the same manner as it presently does; and (b) maintain its properties and facilities in as good working order and condition as at present, ordinary wear and tear excepted; and (c) perform all of its material obligations under agreements relating to or affecting its assets, properties and rights, if any; and (d) keep in full force and effect present insurance policies or other comparable insurance coverage, if any; and (4) CINECRAFT will not, without the prior written consent of PRVT: (a) make any change in its Articles of Incorporation; or (b) issue any securities, or (c) declare or pay any dividend or make any distribution in respect of their stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of their stock; or (d) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures except in the normal course of business; or (e) increase the compensation payable or to become payable to any Officer, employee or agent, or make any bonus payment to any such person; or (f) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired; or (g) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; or (h) merge or consolidate or agree to merge or consolidate with or into any other corporation. Notwithstanding anything to the contrary contained herein, it shall not be a violation of CINECRAFT's representation, warranties and covenants pursuant to this Agreement if it makes any 4 distributions of dividends with respect to its common shares for the benefit of the CINECRAFT shareholders or it transfers all or a portion of its assets prior to the Final Closing Date; provided that CINECRAFT does not transfer its trademarks, trade names and other intellectual property, or if CINECRAFT issues new share certificates in exchange for old share certificates due to changes among the shareholders prior to the Final Closing Date. ARTICLE IV. REPRESENTATIONS AND COVENANTS OF PRVT PRVT represents and warrants to CINECRAFT at the date hereof and on the Interim Closing Date and the Final Closing Date as follows: (a) ORGANIZATION. PRVT is a corporation duly organized and validly existing in good standing under the laws of the State of Nevada, and it is duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted. The character and location of the assets now owned or regularly leased by PRVT in the conduct of its business and the nature of the business as now transacted by it does not require qualification as a foreign corporation in any jurisdiction. (b) CAPITALIZATION. The authorized capital stock PRVT consists solely of 50,000,000 shares of common stock with a par value of $.001 per share, of which 543,668 shares are issued and outstanding at 10,000,000 shares of Preferred stock with a par value of $.001 per share, none of which are outstanding. Each share of stock of PRVT is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of the preemptive rights of any Shareholder. No option, warrant, call or commitment of any kind obligating PRVT to issue any of its capital stock exists, except as indicated on Exhibit C hereto. PRVT represents and warrants that the holders of the 38,000 common stock warrants will exercise these warrants on or prior to March 3, 1998 at a price of not less that $4 per share. (c) FINANCIAL STATEMENTS. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, copies of the following financial statements of PRVT. Audited Financial Statements for the fiscal years ending March 31, 1997, 1996, 1995, 1994, 1993, 1992 and unaudited financial statements through October 31, 1997. Except as and only to the extent expressly disclosed on a statement signed by the preparer of such financial statements, such financial statements will have been prepared in accordance with generally accepted accounting principles, applied on consistent bases throughout the periods indicated and will present fairly the financial condition of PRVT as of the dates indicated thereon. (d) ACCOUNT RECEIVABLES. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, an accurate list as of the most recent Balance Sheet Date of the accounts and notes receivable of PRVT, if any. 5 (e) PERMITS. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, an accurate list and summary description as of the most recent Balance Sheet Date of all permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights of a material nature owned or held by PRVT, if any. (f) CONTRACTS. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, an accurate complete list as of the most recent Balance Sheet Date of all material contracts and agreements to which PRVT is a party or by which it or any of its property is bound, if any. (g) EMPLOYEE BENEFITS. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, an accurate complete list from its inception or from the inception of any predecessor of pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plans or arrangements, if any. (h) BANKS. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, an accurate list showing, as of the Closing Date: (1) the name of each bank, broker, or other financial institution with which PRVT has accounts or safe deposit boxes; and (2) the names in which the accounts or boxes are held; and (3) the names of each person authorized to draw thereon or have access thereto. (i) VIOLATIONS, SUITS, ETC. PRVT shall deliver to CINECRAFT, on or before January 30, 1998, an accurate complete list of all claims, actions, suits or proceedings instituted, filed, or threatened presently against or affecting PRVT, at law or in equity, or before or by any federal, state, municipal or other governmental department or court, commission, board, bureau, agency or instrumentality wherever located, if any. To the best of the knowledge of PRVT there are no actions, suits, proceedings pending against PRVT which could involve the possibility of any materially adverse judgment or ruling against or liability of PRVT which could affect the assets or the business of PRVT. (j) TITLE. To the knowledge and belief of PRVT, PRVT has good and marketable title to all properties, assets and leasehold estates, real and personal, owned and used in its business, and which is material to the operation of that business, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (A) liens for current taxes and assessments not in default; and (B) lien arising by operation of law of which PRVT has no knowledge of any such liens existing. (k) EXECUTION OF AGREEMENT. To the knowledge and belief of PRVT, the execution of this Agreement will not violate or breach any agreement, contract, or commitment to which PRVT is a party. The Officers of PRVT are duly authorized to execute this Agreement and have taken all action required by law and agreements, charters and bylaws to properly and 6 legally execute this Agreement. (l) TAXES. PRVT warrants, that at the time of closing, PRVT will not have any outstanding due and payable tax liability, whatsoever, including, without limiting the generality of the foregoing, federal, national, or state corporate tax. (m) NO MATERIAL CHANGE. There has been no material adverse change in the financial condition, business or properties of PRVT since October 31, 1997. (n) NO UNDISCLOSED LIABILITIES. PRVT does not have any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which were not fully reflected or reserved against in the October 31, 1997 Balance Sheet or PRVT, except for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since October 31, 1997 which do not exceed $25,000 in total. (o) FULL DISCLOSURE. No representation or warranty made by PRVT in this Agreement or in any exhibit or schedule delivered by PRVT to CINECRAFT pursuant hereto, contains or will contain an untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. (p) BOARD OF DIRECTORS. The entire Board of Directors of PRVT constitutes one director, Mr. Alfredo Villa. The size of the Board shall not be increased during the term of this Agreement, except pursuant to this Agreement or the Milcap Agreement. ARTICLE V. OBLIGATIONS OF PRVT PRIOR TO CLOSING PRVT hereby covenants, warrants and agrees that between the date of this Agreement and the Final Closing Date or the termination of this Agreement, whichever occurs first: (1) It will afford to the Officers and authorized representatives of CINECRAFT access to the plants, properties, books and records of PRVT and will furnish to CINECRAFT such additional financial and operating data and other information as to the business and properties of PRVT as CINECRAFT may from time to time reasonably request. (2) It will cooperate with CINECRAFT, its representatives and counsel in the preparation of any documents or other material which may be required by any governmental agency. CINECRAFT will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential (except such information as CINECRAFT may be required to disclose to any governmental agency) and will not use, and will not knowingly permit others to use, any such information in a manner detrimental to PRVT or in violation of any 7 federal or state statute. (3) PRVT will: (a) carry on its business in substantially the same manner as prior to this agreement; and (b) maintain its properties and facilities in as good working order and condition as at present, ordinary wear and tear excepted; and (c) perform all of its material obligations under agreements relating to or affecting its assets, properties and rights, if any; and (d) keep in full force and effect present insurance policies or other comparable insurance coverage, if any; and (4) PRVT shall not, without the prior written consent of CINECRAFT: (a) make any change in its Articles of Incorporation; or (b) issue any securities, except as is provided for in Exhibit E; or (c) issue any securities, except as contemplated in the Acquisition Agreement with Milcap Media Limited (d) declare or pay any dividend or make any distribution in respect of their stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of their stock; or (e) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures except in the normal course of business; or (f) increase the compensation payable or to become payable to any Officer, employee or agent, or make any bonus payment to any such person; or (g) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired; or (h) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; or 8 (i) merge or consolidate or agree to merge or consolidate with or into any other corporation, except for whatever will be contemplated in the Acquisition Agreement with Milcap Media Limited. ARTICLE VI. OBLIGATIONS OF BOTH PARTIES PRIOR (a) SHAREHOLDERS MEETING. If required by law or determinated advisable by legal counsel, either or both of the parties hereto shall, as soon as practical after the signing of this Agreement, call a shareholders meeting of the party and recommend all matters necessary to consummate the acquisition contemplated by and between the parties. (b) BEST EFFORTS. Subject to Article IX, the parties will use their reasonable best efforts to cooperate in all manners necessary to consummate the transaction contemplated herein on a timely basis. (c) EXCLUSIVITY. During the term of this Agreement, neither PRVT nor CINECRAFT will enter into or continue negotiations with any third party for the sale of the stock and assets of either party, nor any other negotiations that might or would conflict or otherwise affect this Agreement, except for whatever will be contemplated in the Acquisition Agreement with Milcap Media Limited. (d) DISCLOSURE OF INFORMATION. The data and information coming into the possession of any party to this Agreement which is otherwise not publicly known shall be deemed strictly confidential and shall not be disclosed to any third person, whether orally or in writing, including the media, without the prior written consent of the parties to this Agreement. This prohibition shall not prevent any party to this Agreement from making such disclosures as are required by virtue of any law to which it is subject or by any regulatory bodies having jurisdiction and specifically does not apply to news releases that any party is required to make. A copy of a news release that contains information about the intentions set out herein shall be provided to all parties at least three (3) business days prior to the issue of the news release. Notwithstanding anything to the contrary contained herein, PRVT shall not issue any press releases without the prior approval of CINECRAFT. Nothing in this paragraph shall prevent a party from furnishing to any entity with which it is in good faith negotiating in furtherance of its obligations contemplated herein, such information as may reasonably be required by such entity. ARTICLE VII. SECURITIES LAWS AND RESALE OF SHARES (a) UNDERWRITER STATUS. The Shareholders of CINECRAFT have been informed that they may be deemed to be "underwriters" under the Securities Act of 1933 (hereinafter the "Securities Act"), and are required to comply with the requirements of the Securities Act, the Securities Exchange Act of 1934 (hereinafter the "Exchange Act"), various rules and 9 regulations of the Securities and Exchange Commission (hereinafter the "Commission") and state securities laws in connection with any offer or transfer of the stock of PRVT. PRVT has no obligation under the securities laws or under this Agreement to register the stock of the surviving company or to register the shares of stock of PRVT to be delivered pursuant to this Agreement with any state or federal agency or to provide a prospectus for any offer or transfer thereof by the Shareholders, except as set forth in Article VIII below. (b) SECURITIES ACT-RESTRICTIVE LEGEND. Until registration, each certificate representing stock of PRVT issue pursuant to this Agreement shall be imprinted with a legend in substantially the following form: These securities have not been registered with the Securities and Exchange Commission under the Securities Act of 1933 and have been sold in reliance upon the exemption from registration contained in Section 4(2) of such Act. The offer and transfer of the shares represented by this certificate are subject to compliance with the Securities Act of 1933, the Securities Exchange Act of 1934, rules and regulations of the Securities and Exchange Commission and state securities laws, rules and regulations, and no transfer of the shares represented by this certificate shall be valid or effective unless made in accordance therewith. ARTICLE VIII. REGISTRATION OF SHARES AND NASDAQ LISTING (a) REGISTRATION OF COMMON SHARES OF PRVT. PRVT will use its best efforts to take all necessary actions to ensure the registration (the "Exchange Act Registration") of the common shares of PRVT under the U.S. Securities Exchange Act of 1934, said registration to become effective as soon as possible after the Interim Closing Date, to ensure that PRVT will become a fully reporting company, as said term is generally known under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). (b) NASDAQ LISTING. Contemporaneously with registration of the shares of PRVT under the Exchange Act, PRVT will use its best efforts to ensure the listing of the PRVT shares on the NASDAQ Small Cap Market or, if appropriate, the NASDAQ National Market System. (c) REGISTRATION OF CERTAIN SHARES. PRVT specifically agrees to use its best efforts to register (the "Securities Act Registration") 4,000,000 of the 7,500,000 shares of common stock to be issued to CINECRAFT, under the U.S. Securities Act of 1933 (the "Securities Act") so as to permit their resale and, further, agrees that upon such registration, such registration shall be maintained in full force and effect for one (1) year from the date of registration. (d) COOPERATION OF PARTIES. Both parties recognize that the aforementioned registrations will require that the parties provide for such registration substantial information about the operations of the parties, the history of the parties, the identity of officers and directors and 10 audited financial statements prepared in accordance with U.S. requirements. The parties agree to cooperate in all manners necessary to provide the information to cause the aforementioned registrations to be completed. (d) PREPARATION OF DOCUMENTS. The preparation and filing of PRVT of all necessary registration documents and filing with the U.S. federal and state securities authorities in order to effect the Exchange Act Registration and the Securities Act Registration and the preparation and filing with NASDAQ of the Listing Application shall be performed by counsel and independent public accountants chosen by CINECRAFT and agreed by PRVT under CINECRAFT's supervision at PRVT's expense will the full cooperation of the officers, directors, attorneys and independent public accountants of PRVT and CINECRAFT. ARTICLE IX. CONDITIONS PRECEDENT AND RIGHT OF TERMINATION (a) CONDITIONS PRECEDENT TO CLOSING. Unless this Agreement shall be earlier terminated in accordance with the terms hereof, the closing of the Stock Exchange and the release of shares from escrow shall take place within 10 days following the date (the "Final Closing Date") on which all of the following have been satisfied: 1. The parties shall have entered into a mutually satisfactory escrow agreement, in accordance with the terms of this Agreement with an escrow agent selected by CINECRAFT. 2. PRVT shall have issued and delivered the PRVT Securities to the escrow agent by January 30, 1998. 3. Shareholders of CINECRAFT owning at least 80% of the issued and outstanding shares of CINECRAFT shall have delivered such shares of the escrow agent by January 30, 1998. 4. That each certificate of PRVT be issued pursuant to Section 4(2) of the Securities Act and shall contain the restrictive legend as indicated in Article VI herein, until such time as they are registered under the Securities Act. 5. Each shareholder of CINECRAFT that has delivered shares to the escrow agent agrees that their shares and the PRVT shares to be issued to them shall be held in escrow until such time as the right of termination contained in (b) and (d) below has passed. 6. PRVT shall have filed a registration statement Form 10 to register as a public company under the Exchange Act and the Securities and Exchange Commission ("SEC") shall have completed its review of such registration statement on a satisfactory basis. 11 7. PRVT shall have filed a registration statement with the SEC under the Securities Act for the sale by the shareholders of CINECRAFT of the 4,000,000 shares of Common Stock and such registration statement shall have been declared effective by the SEC. 8. The shares of Common Stock of PRVT shall have been approved for listing on either the NASDAQ Small Cap or National Market Systems. (b) RIGHT OF TERMINATION OF CINECRAFT. CINECRAFT shall have the unilateral right to terminate all transactions contemplated under this Agreement, for whatever reason it deems appropriate or for no reason, at any time prior to the effective date (the "Listing Date") of the NASDAQ listing, by giving written notice to PRVT. From and after the Listing Date, this right of termination shall expire and be of no further force or effect. (c) PENALTY IN THE EVENT OF CINECRAFT TERMINATION. In the event hat CINECRAFT terminates the transactions contemplated by this Agreement pursuant to subparagraph (b) above, the only penalty suffered by CINECRAFT will be a requirement to reimburse PRVT for all reasonable direct costs, including legal and accounting, which PRVT has incurred in connection with the Exchange Act Registration, the Securities Act Registration and the NASDAQ Listing up to a maximum of $100,000; provided that CINECRAFT shall not be required to reimburse PRVT for any such expenses if PRVT shall have breached any of its representations, warranties and covenant contained herein. (d) RIGHT OF TERMINATION OF PRVT. For so long as CINECRAFT is proceeding in good faith pursuant to Article VIII hereof to effect the Exchange Act Registration, the Securities Act Registration and the NASDAQ Listing, PRVT shall not have the right to terminate this Agreement unless such registrations and listing shall not have been completed by June 30, 1998. Thereafter, PRVT shall have the unilateral right to terminate all transactions contemplated under this Agreement, for whatever reason it deems appropriate at any time prior to the Listing Date, by giving written notice to CINECRAFT. From and after the Listing Date, this right of termination shall expire and be of no further force or effect. (e) PENALTY IN THE EVENT OF PRVT TERMINATION. In the event that PRVT terminates the transactions contemplated by this Agreement pursuant to subparagraph (d) above, the only penalty suffered by PRVT will be its responsibility for all reasonable direct costs, including legal and accounting, which CINECRAFT has incurred in connection with the Exchange Act Registration, the Securities Act Registration and the NASDAQ Listing up to a maximum of $100,000; provided that PRVT shall not be required to reimburse CINECRAFT for any such expense if CINECRAFT shall have breached any of its representations, warranties and covenants contained herein. (f) NO OTHER PENALTIES. In the event of a termination by either party under the terms of this section, the only penalties, rights to reimbursement, damages, or claims that either party may have against the other shall be limited to the penalties contained in this section. 12 (g) Each of the parties hereto will provide the other party with monthly written expense reports, which set forth any expenses for which such party intends to seek reimbursement under this Article IX. (h) Upon the termination of this Agreement, the escrow shall return the deposited securities to the party depositing the same. ARTICLE X. BOARD OF DIRECTORS OF PRVT (a) APPOINTMENT. On or any time after the Closing Date, CINECRAFT is entitled to appoint one of the Directors to the Board of Directors of PRVT. (b) RESIGNATION. In the event that CINECRAFT or PRVT terminates the transactions contemplated by this Agreement, the Director appointed pursuant to subparagraph (a) above, will automatically resign from his position. ARTICLE XI. EFFECTIVENESS, CLOSING, ESCROW AGENT (a) BINDING EFFECT. This Agreement shall be binding and effective as to all parties hereto upon the signing of this Agreement by PRVT and CINECRAFT. (b) CLOSING DATES. For the purpose of this Agreement, the Interim Closing Date shall be that date upon which the escrow agent has in it possession the shares and other consideration contained in Article I, paragraphs (a) and (b) herein. The "Final Closing Date" shall be the date on which all of the conditions set forth in Article IX (a) have been satisfied. (c) ESCROW AGENT. The parties agree that they shall enter into an escrow agreement before January 30, 1998 to hold the PRVT and CINECRAFT preferred shares and warrants subject to the terms of this Agreement. Any and all escrow expenses shall be shared equally between the parties. (d) FORM OF ACQUISITION. Because of the complexity of this acquisition, the parties acknowledge that the exact form and structure of the final acquisition will be based upon numerous legal and taxation questions which have not been determined at this time. Therefore, the parties agree that the final form and organization of this acquisition will be determined based upon the advice of legal and accounting professionals so as to maximize the benefit to all of the parties. ARTICLE XII. GENERAL (a) ADDITIONAL INSTRUMENTS. The parties hereto shall deliver or cause to be delivered on the Final Closing Date, and at such other times and places as shall be reasonably agreed 13 on, such additional instruments as any party may reasonably request for the purpose of carrying out this Agreement. PRVT and CINECRAFT will cooperate and use their reasonable best efforts to have the present Officers, Directors and employees of PRVT and CINECRAFT cooperate on and after the Final Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Final Closing Date. (b) ASSIGNMENT. This Agreement and the rights of PRVT and CINECRAFT hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, and the successors of and the heirs and legal representatives of the parties hereto. (c) ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding between the parties hereto and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement may be modified or amended only by a duly authorized written instrument executed by the parties hereto. (d) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. It shall not be necessary that any single counterpart hereof be executed by all parties hereto so long as at least one counterpart is executed by each party. (e) SURVIVORSHIP. All warranties, covenants, representations and guarantees shall survive the closing and execution of the documents contemplated by this Agreement. The parties hereto in executing, and in carrying out the provisions of this Agreement are relying solely on the representation, warranties and agreements contained in this Agreement or in any writing delivered pursuant to provisions of this Agreement or at the closing of the transactions herein provided for and not upon any representation, warranty, agreement, promise or information, written or oral, made by any person other than as specifically set forth herein or therein. (f) FEES. Each party agrees to pay their own fees, expenses and disbursements to their agents, representatives, accountants and counseling incurred in connection with the subject matter of this Agreement and any amendments thereto subject only to any other provisions of this Agreement. (g) REQUIREMENTS OF NOTICE. All requirements for notice contained herein shall be deemed effective upon delivery to the addresses of the respective parties contained herein by certified mail, courier, facsimile, or personal delivery. 14 (h) LAW. This Agreement shall be governed and construed in accordance with the laws of the State of New York without giving effect to any choice of conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. The parties expressly consent to the personal and subject matter jurisdiction of the courts (federal and state) in New York in connection with any disputes arising out of or based upon this Agreement of the transactions contemplated hereby. (i) MILCAP AGREEMENT. Notwithstanding anything to the contrary contained herein, the Final Closing Date and the Stock Exchange shall not occur unless there is a simultaneous closing pursuant to that certain agreement dated the date hereof between PRVT and MILCAP.. (j) CORPORATE NAME. Within 5 days following the termination of this Agreement, PRVT shall change its corporate name to a name other than "Private Media Group, Inc." or any other variation thereof. Thereafter, PRVT shall not use the name "Private Media Group" or any variation thereof for any corporate or trademark or trade name purposes and acknowledges and agrees that CINECRAFT shall have the sole ownership of right to use such name. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. Private Media Group, Inc. By --------------------------------------------- Alfredo M. Villa, President and Secretary ON BEHALF OF THE SHAREHOLDERS OF CINECRAFT. CINECRAFT Limited By --------------------------------------------- Niamh Whelan, Director 15 EX-23.1 5 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 19, 1998, in the Registration Statement (Form SB-2) and related Prospectus of Private Media Group, Inc. for the registration of 4,700,000 shares of its Common Stock. ERNST & YOUNG AB Stockholm, Sweden August 19, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 SWEDISH KRONOR 12-MOS 6-MOS DEC-31-1997 JUN-30-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 JUN-30-1998 0.1356 0.1356 3,698 2,790 0 0 47,632 66,471 0 0 20,497 25,522 76,001 105,644 6,998 8,172 1,366 1,830 162,688 201,133 27,164 36,910 0 0 0 0 0 0 7,992 7,997 0 0 162,688 201,133 144,543 99,186 144,543 99,186 75,674 46,680 75,674 46,680 0 0 0 0 321 259 34,935 28,394 (2,052) 210 0 0 0 0 0 0 0 0 36,987 28,183 4.93 3.49 2.43 1.80
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