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| PRVT > SEC Filings for PRVT > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
You should read this section together with the consolidated financial statements
and the notes and the other financial data in this Report. The matters that we
discuss in this section, with the exception of historical information, are
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995. Such forward-looking statements are subject to risks, uncertainties
and other factors which could cause our actual results to differ materially from
those expressed or implied by such forward-looking statements. Potential risks
and uncertainties relate to factors such as (1) the timing of the introduction
of new products and services and the extent of their acceptance in the market;
(2) our expectations of growth in demand for our products and services; (3) our
ability to successfully implement expansion and acquisition plans; (4) the
impact of expansion on our revenue, cost basis and margins; (5) our ability to
respond to changing technology and market conditions; (6) the effects of
regulatory developments and legal proceedings with respect to our business;
(7) the impact of exchange rate fluctuations; and (8) our ability to obtain
additional financing.
The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Report. References in this report to "we," us," "the Company" and Private refer to Private Media Group, Inc., a Nevada corporation, including its consolidated subsidiaries.
Overview
We are an international provider of adult media content. We acquire still photography and motion pictures from independent directors and process these images into products suitable for popular media formats such as print publications, DVDs and digital media content for Broadcasting, Mobile and Internet distribution. In addition to media content, we also market and distribute branded leisure and novelty products oriented to the adult entertainment lifestyle and generate additional sales through the licensing of our Private trademark to third parties.
We operate in a highly competitive, service-oriented market and are subject to changes in business, economic and competitive conditions. Nearly all of our products compete with other products and services that utilize adult leisure time and disposable income.
We generate revenues primarily through:
• sales of movies on DVD;
• sales of adult feature magazines;
• Internet subscriptions and licensing;
• broadcasting movies through IPTV (Internet Protocol Television), cable, satellite and hotel television programming;
• sales of adult mobile content (wireless); and
• content, brand name and trademark licensing.
Over time, we expect net sales from DVDs & magazines to continue to decline as a percentage of net sales in relation to total net sales from Internet, broadcasting and wireless. We expect net sales from Internet, wireless and broadcasting to grow during the coming years.
Even though we recognize net sales upon delivery, we generally provide extended payment terms to our distributors of between 90 and 180 days. Although our extended payment terms increase our exposure to accounts receivable write-offs, we believe our risk is minimized by our generally long-term relationships with our distributors. In addition, we view our extended payment terms as an investment in our distribution channels which are important to the growth of our business.
Our primary expenses include:
• acquisition of content for our library of photographs and videos;
• printing, processing and duplication costs; and
• selling, general and administrative expenses.
Our magazines and DVD covers are printed by independent third-party printers in Spain. We introduced DVDs as a motion picture medium in 1999. DVDs have a relatively low cost of duplication, inclusive of box and packaging, of approximately $1.00 per unit. Our DVDs are duplicated on an all region format, playable on both NTSC and PAL with multiple languages and sub-titles.
We released 101 titles on DVD during 2007, including both new and archival material. We plan to release approximately 88 proprietary titles on DVDs in 2008.
Over the years, our cost of sales has been fluctuating relative to net sales due to our use of new mediums for our products, such as the Internet, DVD broadcasting and wireless. Internet, wireless and broadcasting sales has historically not carried any significant cost of sales and variations in these areas affect the overall cost of sales percentage in relation to sales. These new media provide us with additional sales of our existing content.
We also incur significant intangible expenses in connection with the amortization of our library of photographs and movies and capitalized development costs, which include the Internet. We amortize these tangible and intangible assets on a straight-line basis for periods of between three and five years.
Restructuring
During the first quarter of 2008 restructuring plans were developed in response to the shift of the Company's business model from traditional physical delivery of our content to digital new media distribution. The plans consist of three main features a) reorganizing distribution of physical products, b) reviewing and revising content requirements and related costs, and c) consolidating operations in line with our new business model.
With respect to the reorganization of distribution of physical products, we have outsourced our DVD distribution in France to a third party and re-organized our French subsidiary. As a result we will make savings of EUR 0.5 million per year in overheads and we expect sales volumes to increase significantly. We are continuing to review our model for distribution of physical products and additional changes are expected.
We have also reviewed our magazine production and distribution and reduced the number of new publications from four to two, as from the third quarter this year. We have replaced the two cancelled publications with back catalogue magazines. We do not believe this will have any material impact on sales since we distribute all our magazines together with back catalogue DVDs and research has indicated that consumers are primarily interested in the DVDs.
With respect to consolidating operations, we are reviewing all our processes in order to take advantage of technological advances and potential outsourcing opportunities, and in order to eliminate duplicate functions. During the nine-month period ending September 30, 2008 we have reduced the Company's headcount, including employees and temporary agency employees, by 18 to 105.
We expect to continue to focus on cost reductions and expect additional restructuring actions in the near term.
Critical Accounting Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to impairment of the library of photographs and videos and other long lived assets, allowances for bad debt, income taxes and contingencies and litigation. Accounts receivable and sales related to certain products are, in accordance with industry practice, subject to distributors right of return to unsold items. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Management periodically reviews such estimates. Actual results may differ from these estimates as a result of unexpected changes in trends.
We believe the following critical accounting policies are significantly affected by judgments and estimates used in the preparation of our consolidated financial statements.
The Company sells magazines to wholesalers on firm sale basis and via national newsstand distributors with the right to return. Our magazines are multi-lingual and the principal magazine market is in Europe.
Revenues from the sale of magazines under agreements that grant distributors rights-of-return are recognized upon transfer of title, which generally occurs on delivery, net of an allowance for returned magazines. Distributors with the right to return are primarily national newsstand distributors. Most of our magazines are bi-monthly (six issues per year) and remain on sale at a newsstand for a period of two months. Normally, all unsolds are reported to us within a period of four to six months from delivery. There are normally two to four national newsstand distributors for all newspapers and periodicals operating in each country. A majority of our national newsstand distributors are members of Distripress, the international organization for publishers and distributors, and carry out the distribution of the largest national and international newspapers and periodicals, including: Financial Times, Herald Tribune, Time, Newsweek, Vogue, etc.
The Company uses specific return percentages per title and distributor based on estimates and historical data. The percentages vary from 50-80%. Higher percentages generally reflect newer markets and/or products. Percentages are reviewed on an on-going basis.
The magazines have an approximate retail price of EUR 11.50 (USD 16.90) per copy and are printed on glossy high-quality paper at a cost of EUR 1.25 (USD 1.84). They are often shrink-wrapped in order to comply with local regulation or guidance for the sale of adult publications. In view of the high retail price, the margin and the physical quality of the magazines and the fact that the content has a very long "shelf-life" since it is not particularly linked to time, trends, fashion or current events, the Company has always collected the returns from newsstands in order to make them available for sale again.
The Company has scheduled re-distribution of the returned magazines, via national newsstand distributors, as Megapacks or Superpacks (three different copies per pack) where the retail price is EUR 14.95 (USD 21.99). As the national newsstand distributors have the right to return, the packs come back to us and are then broken up in individual copies in order to be sent out in DVD packs, see below, or sold on firm sale basis to wholesalers as back numbers at a lower price than new issues.
The Company also operates scheduled re-distribution of returned magazines, via national newsstand distributors, together with DVDs as Magazine/DVD packs as a way of increasing DVD distribution. Since the national newsstand distributors have the right to return, the DVD packs are returned and the magazines are broken out in order to be sold on firm sale basis to wholesalers as back numbers at a lower price than new issues. The Company has historically sold all copies printed at an average price higher than, or equal, to cost.
Revenues from the sale of DVD products under consignment agreements with
distributors are recognized based upon reported sales by the Company's
distributors. Revenues from the sale of subscriptions to the Company's internet
website are deferred and recognized ratably over the subscription period.
Revenues from licensing of broadcasting rights to the Company's video and film
library are recognized upon delivery when the following conditions have been met
(i) license period of the arrangement has begun and the customer can begin its
exploitation, exhibition, or sale (ii) the arrangement fee is fixed or
determinable and (iii) collection of the arrangement fee is reasonably assured.
Revenues from mobile content sales (wireless) are recognized based on sales reported each month by mobile operators via aggregators. The aggregators do not report actual monthly sales for each of their operators to the Company until approximately 60-90 days after the month of service ends. This practice requires management to make monthly revenue estimates based on historical experience for each affiliated system. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt. Adjustments made to adjust revenue from estimated to actual have historically been immaterial.
Accounts receivable
We are required to estimate the collectibility of our trade receivables and notes receivable. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer. Significant changes in required reserves have been recorded in the past and may occur in the future due to the current market environment.
Management reviews the allowance for doubtful accounts on at least a quarterly basis and adjusts the balance based on their estimate of the collectibility of specific accounts as well as a reserve for a portion of other accounts which have been outstanding for more than 180 days. This estimate is based on historical losses and information about specific customers. After collection attempts have failed, the Company writes off the specific account.
Goodwill and Other Intangible Assets
On January 1, 2002 the Company adopted Financial Accounting Standards Board Statement (SFAS) No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, goodwill and indefinite lived intangible assets will no longer be amortized but will be reviewed annually for impairment (or more frequently if indicators of impairment arise).
The Company performs impairment tests of goodwill and indefinite lived intangible assets annually. The Company is required to assess these assets for recoverability when events or circumstances indicate a potential impairment by estimating the undiscounted cash flows to be generated from the use of these assets. There has historically been no effect on the earnings and financial position of the Company as a result of the impairment testing.
Other Intangible Assets represents the value attributable to certain acquisitions. Amortization expense is calculated on a straight-line basis over 10 years.
The Company periodically evaluates the carrying value of long-lived assets including its library of photographs and videos for potential impairment. Upon indication of impairment, the Company will record a loss on its long-lived assets if the undiscounted cash flows that are estimated to be generated by those assets are less than the related carrying value of the assets. An impairment loss is then measured as the amount by which the carrying value of the asset exceeds the estimated discounted future cash flows. Management's estimated future revenues are based upon assumptions about future demand and market conditions and additional write downs may be required if actual conditions are less favorable than those assumed.
Inventories
Inventories are valued at the lower of cost or market, with cost principally determined on an average basis. Inventories principally consist of DVD's, videocassettes and magazines held for sale or resale. The inventory is written down to the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.
Results of Operations
Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net sales. For the three months ended September 30, 2008, we had net sales of EUR 4.6 million compared to net sales of EUR 7.5 million for the three months ended September 30, 2007, a decrease of EUR 2.9 million.
DVD & Magazine sales decreased EUR 1.4 million to EUR 1.6 million in the period. The reduction in DVD & Magazine sales was primarily attributable to reorganization of our distribution and an industry wide decrease in DVD sales (see discussion under Outlook below). Due to the weakening dollar2 and the restructuring of our web sites, Internet sales decreased by EUR 0.2 million to EUR 1.1 million. Broadcasting sales decreased EUR 1.0 million to EUR 1.5 million as a result of the absence of sales of EUR 1.0 million from a non-recurring title licensing deal for German speaking Europe in 2007. Wireless sales decreased EUR 0.3 million to EUR 0.4 million in the period as a result of a re-organization of content delivery structure. The re-organization was completed in the fall of 2008.
Going forward, we expect Internet, wireless and Broadcasting sales, in particular, to increase (see discussion under Outlook below).
Net sales in general were affected by changes in exchange rates. The three-month average US dollar exchange rate for the period was 9% lower compared to the same period in 2007. This reduced all our sales in dollar by the same percentage. Fluctuations in exchange rates between the euro and the dollar can affect the comparability of our results from year to year. We translate our consolidated subsidiaries whose functional currency is not the euro into the euro for reporting purposes. Income statement amounts are translated into euros using the average exchange rate for the period. The balance sheet is translated at the period-end exchange rate.
2 Our Internet sites collect a significant part of their sales from US customers.
Included in cost of sales is printing, processing and duplication, amortization of library and Internet, broadcasting and wireless costs. Printing, processing and duplication cost was EUR 1.2 million for the three months ended September 30, 2008 compared to EUR 2.0 million for the three months ended September 30, 2007, a decrease of EUR 0.8 million. Printing, processing and duplication cost as a percentage of DVD & Magazine sales was 77% for the three months ended September 30, 2008 compared to 68% in the same period last year. The increase was the result of an increase in sales volume sold at a lower average price as part of a program to reduce stock levels. Amortization of library was EUR 1.5 million for the three months ended September 30, 2008 compared to EUR 1.6 million for the three months ended September 30, 2007, which represents a decrease of EUR 0.1 million. Amortization of library does not vary with sales since it reflects the amortization of our investments in content which has been available for sale for a period of three to five years. Internet, broadcasting and wireless cost was EUR 0.7 million for the three months ended September 30, 2008 compared to EUR 0.4 million for the three months ended September 30, 2007. Internet, broadcasting and wireless cost as a percentage of related sales in the period was 22% compared to 9% in the same period last year. The increase was primarily the result of increased internet cost.
Gross Profit. In the three months ended September 30, 2008, we realized a gross profit of EUR 1.2 million, or 26% of net sales compared to EUR 3.5 million, or 46% of net sales for the three months ended September 30, 2007. The decrease in gross profit was primarily the result of reduced sales and increased variable cost offset by decreased amortization of library.
Selling, general and administrative expenses. Our selling, general and administrative expenses were EUR 2.6 million for the three months ended September 30, 2008 compared to EUR 3.1 million for the three months ended September 30, 2007, a decrease of EUR 0.5 million. The decrease is the result of our restructuring plan, see discussion above.
Operating profit/loss. We reported an operating loss of EUR 1.4 million for the three months ended September 30, 2008 compared to an operating profit of EUR 0.3 million for the three months ended September 30, 2007. The change was the result of the decrease in gross profit offset by the decrease in selling, general and administrative expenses.
Interest expense. We reported interest expense of EUR 0.1 million for the three months ended September 30, 2008, compared to EUR 0.1 million for the three months ended September 30, 2007.
Income tax benefit. We reported income tax benefit of EUR 0.4 million for the three months ended September 30, 2008, compared to EUR 0.1 million for the three months ended September 30, 2007. The increase in income tax benefit is a result of higher losses being recorded in jurisdictions with higher corporate tax rates.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net sales. For the nine months ended September 30, 2008, we had net sales of EUR 15.0 million compared to net sales of EUR 18.9 million for the nine months ended September 30, 2007, a decrease of EUR 3.9 million.
DVD & Magazine sales decreased EUR 1.9 million to EUR 5.8 million. The reduction in DVD & Magazine sales was primarily attributable to an industry wide decrease in DVD sales (see discussion under Outlook below). Due to the weakening dollar3 and the restructuring of our web sites, Internet sales decreased EUR 0.2 million to EUR 3.3 million compared to the same period last year. Broadcasting sales decreased EUR 1.3 million, to EUR 4.5 million as a result of the absence of sales of EUR 2.0 million from a non-recurring title licensing deal for German speaking Europe in 2007 offset primarily by an increase in video on demand sales via IPTV. Wireless sales decreased EUR 0.5 million to EUR 1.4 million in the period as a result of a re-organization of content delivery structure. The re-organization was completed in the fall of 2008.
Going forward, we expect Internet, wireless and Broadcasting sales, in particular, to increase (see discussion under Outlook below).
Net sales in general were affected by changes in exchange rates. The nine-month average US dollar exchange rate for the period was 12% lower compared to the same period in 2007. This reduced all our sales in dollar by the same percentage. Fluctuations in exchange rates between the euro and the dollar can affect the comparability of our results from year to year. We translate our consolidated subsidiaries whose functional currency is not the euro into the euro for reporting purposes. Income statement amounts are translated into euros using the average exchange rate for the period. The balance sheet is translated at the period-end exchange rate.
Cost of Sales. Our cost of sales was EUR 10.3 million for the nine months ended September 30, 2008 compared to EUR 10.2 million for the nine months ended September 30, 2007, an increase of EUR 0.1 million.
Included in cost of sales is printing, processing and duplication, amortization of library and Internet, broadcasting and wireless costs. Printing, processing and duplication cost was EUR 3.8 million for the nine months ended September 30, 2008 compared to EUR 4.0 million for the nine months ended September 30, 2007, a decrease of EUR 0.2 million. Printing, processing and duplication cost as a percentage of DVD & Magazine sales was 65% for the nine months ended September 30, 2008 compared to 51% in the same period last year. The increase was the result of an increase in sales volume sold at a lower average price as part of a program to reduce stock levels. Amortization of library was EUR 4.7 million for the nine months ended September 30, 2008 compared to EUR 5.0 million for the nine months ended September 30, 2007, which represents a decrease of EUR 0.3 million. Amortization of library
3 Our Internet sites collect a significant part of their sales from US customers.
Gross Profit. In the nine months ended September 30, 2008, we realized a gross profit of EUR 4.7 million, or 31% of net sales compared to EUR 8.7 million, or 46% of net sales for the nine months ended September 30, 2007. The decrease in gross profit was primarily the result of reduced sales and increased variable cost offset by decreased amortization of library.
Selling, general and administrative expenses. Our selling, general and administrative expenses were EUR 8.7 million for the nine months ended September 30, 2008 compared to EUR 9.3 million for the nine months ended September 30, 2007, a decrease of EUR 0.6 million. The decrease is the result of our restructuring plan, see discussion above.
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