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| PRVT > SEC Filings for PRVT > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
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 and distributor of adult media content. We acquire or license content from independent studios and directors and process these images into products suitable for popular media formats such as digital media content for Broadcasting, Mobile and Internet distribution, and print publications and DVDs. 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.
On January 20, 2009 we expanded our Internet operations through the acquisition of Game Link LLC and its affiliates, companies engaged in digital distribution of adult content over the Internet and eCommerce development. GameLink is a leading US adult entertainment VOD and eCommerce platform through its GameLink.com website. The site's installed user base represents over one million domestic and international customers and it serves over 100,000 users daily. Including 70,000 video titles, GameLink has the largest library of digital and physical adult media and novelties in the United States
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:
• Internet e-commerce, subscriptions and licensing;
• the broadcasting of movies through IPTV (Internet Protocol Television), cable, satellite and hotel television programming;
• sales of DVDs and magazines;
• sales of adult mobile content (wireless); and
• content, brand name and trademark licensing.
We recognize net sales on delivery (for further information, see Critical Accounting Estimates).
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 and licensing of content for our library of photographs and videos;
• web page development costs;
• printing, processing and duplication costs; and
• selling, general and administrative expenses.
With respect to proprietary video titles, we released 87 titles during 2008, 101 titles during 2007, and 110 titles during 2006, including both new and archival material. We plan to release approximately 50 titles in 2009.
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. 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.
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.
Recognition of Revenue
The Company's revenue recognition policies are in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements. One of the Company's primary sources of revenue is sales of its video on-demand offerings, which are sold directly via its on-line retail website and paid for almost exclusively by credit card. The Company recognizes revenue from video on demand when the service is rendered and collectibility is reasonably assured, specifically, when the customer's credit card is charged, which is, in most cases, simultaneous with delivery of the on-demand video. Credit card payments accelerate cash flow and reduce the Company's collection risk, subject to the merchant bank's right to hold back cash pending settlement of the transactions. The Company also offers a prepaid video on-demand service in which a customer purchases a number of minutes of on-demand video at a set rate per minute based on the number of minutes purchased. The rate per minute decreases as the number of prepaid minutes increases. The Company records revenue from pre-pay customers as deferred revenue prior to commencement of services and recognizes revenue as the services are rendered. Prepaid minutes purchased under this program do not expire.
The Company also offers a customer loyalty program under which each member's purchase of video on-demand, DVDs, movie downloads, books, novelties or other items earns the member one point for each dollar spent. After accumulating 150 points, a customer may redeem the points for a $5 purchase. Points increase in value as they are accumulated and redeemed, with a maximum accumulation of 2,000 points, which may be redeemed for a $200 purchase. All of a customer's points expire after 180 days of no purchase activity. The Company follows the guidance in Emerging Issues Task Force No. 00-22 ("EITF 00-22"), Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future, Issue No. 2 in accounting for its loyalty program. Because the value of the award points is not significant in relation to the value of the services or products purchased by the customer, The Company records a liability for the estimated cost of the discounted services or products to be provided in the future.
Revenues from IPTV (Internet Protocol Television), satellite & cable broadcasting are recognized based on sales reported each month by its IPTV, cable and satellite affiliates. The affiliates do not report actual monthly sales for each of their systems 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.
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.
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.
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.
Impairment of Long-Lived Assets
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.
The Company follows the guidance of Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1") and Emerging Issues Task Force Issue No. 00-2, Accounting for Web Site Development Costs ("EITF 00-2"). EITF 00-2 prescribes the accounting for website development costs based on the type of website development activity. In accordance with SOP 98-1 and the transition provisions of EITF 00-2, The Company has elected to apply this standard to costs incurred to develop its websites from January 1, 2000 forward. The Company capitalizes qualifying development costs which are incurred during the application development stage and in website enhancement activities, including graphics and related software. Capitalized website development costs for The Company's on-demand and retail services are amortized on a straight-line basis over periods of three to five years and are included in property and equipment in the accompanying consolidated balance sheets. Costs related to website maintenance are expensed as incurred.
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 March 31, 2009 compared to the three months ended March 31, 2008
Net sales. For the three months ended March 31, 2009, we had net sales of EUR 5.8 million compared to net sales of EUR 5.3 million for the three months ended March 31, 2008, an increase of EUR 0.6 million. The increase was the result of increased Internet sales offset by decreases in sales of DVD & Magazines, broadcasting and wireless.
Internet sales increased EUR 1.9 million to EUR 3.0 million, which represents an increase of 162% compared to the same period last year. The increase in Internet sales was the result of the acquisition of GameLink. DVD & Magazine sales decreased EUR 0.8 million, or 38%, to EUR 1.4 million. The reduction in DVD & Magazine sales was primarily attributable to an industry wide decrease in DVD sales (see discussion under Outlook below). Broadcasting sales decreased EUR 0.4 million, or 28%, to EUR 0.9 million primarily as a result of a decrease in title sales, offset by increases in TV-channel sales and video on demand sales via IPTV. Wireless sales decreased by EUR 0.1 million to EUR 0.5 million in the period.
Going forward, we expect Internet, wireless and Broadcasting sales to increase (see discussion under Outlook below).
Cost of Sales. Our cost of sales was EUR 3.6 million for the three months ended March 31, 2009 compared to EUR 3.4 million for the three months ended March 31, 2008, an increase of EUR 0.2 million, or 5%.
Included in cost of sales is Internet, broadcasting and wireless cost. printing, processing and duplication and amortization of library. Internet, broadcasting and wireless cost was EUR 1.5 million for the three months ended March 31, 2009 compared to EUR 0.5 million for the three months ended March 31, 2008. Internet, broadcasting and wireless cost as a percentage of related sales
Gross Profit. In the three months ended March 31, 2009, we realized a gross profit of EUR 2.2 million, or 39% of net sales compared to EUR 1.9 million, or 35% of net sales for the three months ended March 31, 2008. The increase in gross profit as a percentage of sales was primarily the result of reduced margins on DVD & Magazine sales.
Selling, general and administrative expenses. Our selling, general and administrative expenses were EUR 3.6 million for the three months ended March 31, 2009 compared to EUR 3.3 million for the three months ended March 31, 2008, an increase of EUR 0.3 million, or 11%. The acquisition of GameLink added EUR 1.0 million which was offset by EUR 0.8 million in reduced selling, general and administrative expenses in all other areas except bad debt provision, which increased by EUR 0.1 million.
Operating loss. We reported an operating loss of EUR 1.4 million for the three months ended March 31, 2009 compared to an operating loss of EUR 1.4 million for the three months ended March 31, 2008.
Interest expense. We reported interest expense of EUR 0.1 million for the three months ended March 31, 2009, compared to EUR 0.1 million for the three months ended March 31, 2008.
Income tax benefit. We reported income tax benefit of EUR 0.6 million for the three months ended March 31, 2009, compared to EUR 0.6 million for the three months ended March 31, 2008.
Net loss. We reported a loss of EUR 0.8 million for the three months ended March 31, 2009, compared to EUR 0.8 million for the three months ended March 31, 2008.
Liquidity and Capital Resources
We reported a working capital surplus of EUR 13.2 million at March 31, 2009, a decrease of EUR 2.6 million compared to the year ended December 31, 2008. The decrease is principally attributable to a increase in current liabilities as a result of the acquisition of GameLink.
Net cash provided by operating activities was EUR 1.0 million for the three months ended March 31, 2009, and was primarily the result of net income, as adjusted for non-cash transactions, and cash related to changes in operating assets and liabilities. The net loss of EUR 0.8 million was adjusted to reconcile net income to net cash flows from operating activities with bad debt provision of EUR 0.1 million, amortization of web pages of EUR 0.3 million depreciation of EUR 0.2 million and amortization of photographs and videos of EUR 1.4 million making a total of EUR 2.1 million, providing a net balance of EUR 1.3 million. The total of EUR 1.3 million was added to by changes in trade accounts receivable, inventories, and prepaid expenses and other current assets totaling EUR 0.8 million offset by EUR 1.1 million from related party receivable, income taxes payable. accounts payable trade and accrued other liabilities. Net cash provided by operating activities was EUR 2.3 million for the three months ended March 31, 2008. The decrease in net cash provided by operating activities of EUR 1.3 million for the three months ended March 31, 2009 compared to the same period last year was primarily the result of changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2009 was EUR 0.7 million. The investing activities were principally capital expenditure of EUR 0.1 million and investment in library of photographs and videos of EUR 0.6 million, which was carried out in order to maintain the 2009 release schedules. Net cash used in investing activities decreased EUR 1.2 million over the same period last year. The decrease is principally due to lower investment activity in library of photographs and videos as a result of a lower demand for new releases on new media platforms as opposed to traditional media which required a higher frequency.
Financing Activities
Net cash used in financing activities for the three-month period ended March 31, 2009 was EUR 0.1 million. Compared to the three-month 2008 period there was no material change.
Contractual obligations
During the three-month period ended March 31, 2009, we have not experienced any material changes in our contractual obligations compared to what was reported in our Form 10-K for the year ended December 31, 2008.
Disputed contractual obligation
In December 2001 the group's holding company, Private Media Group, Inc., borrowed $ 4.0 million from Commerzbank AG pursuant to a Note originally due on December 20, 2002. The Note bore interest at an annual rate of 7%, payable quarterly, with the entire principal amount and accrued interest originally due on December 20, 2002. The Note is guaranteed by Slingsby Enterprises Limited, an affiliate of Berth Milton, Private's Chairman, Chief Executive Officer and principal shareholder, and the guaranty is secured by 4,950,000 shares of Private Media Group, Inc. Common Stock. In December 2002 Commerzbank AG agreed to extend the maturity date of the Note to March 20, 2003.
In April 2003 the Note was acquired by Consipio Holding b.v. from Commerzbank AG, and Consipio and Private reached an agreement-in-principle with Consipio to extend the maturity of the Note until April 2008. However, Consipio and Private were unable to reach final agreement on other terms and conditions relating to the restructured Note. Accordingly, in December 2003 Consipio notified Private and Slingsby Enterprises that Private was in default under the Note, and demanded $3.4 million as payment in
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