U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended...............September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.........to..........
Commission file number 000-25067
PRIVATE MEDIA GROUP, INC.
(Exact Name of Issuer as Specified in its Charter)
Nevada 87-0365673
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain
(Address of principal executive offices)
34-93-590-7070
--------------
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at November 2, 2001
----- -------------------------------
Common Stock, par value $.001 28,161,406
PART I.
Item 1. Financial Statements
PRIVATE MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
(Unaudited)
------------ -----------------------------
2000 2001 2001
------------- ------------- -------------
SEK SEK USD
(in thousands)
ASSETS
Cash and cash equivalents........................... 14,381 17,400 1,632
Short-term investments (Note 5)..................... - 28,059 2,632
Trade accounts receivable - net..................... 116,555 162,651 15,258
Related party receivable............................ 4,515 11,783 1,105
Inventories - net (Note 3).......................... 56,677 69,157 6,488
Prepaid expenses and other current assets........... 29,340 29,657 2,782
------- ------- ------
TOTAL CURRENT ASSETS................................ 221,468 318,708 29,898
Library of photographs and videos - net............. 104,183 126,066 11,826
Property, plant and equipment - net................. 18,150 24,875 2,333
Goodwill - net (Note 4)............................. 15,843 26,344 2,471
Asset held for sale................................. 20,976 - -
Other assets........................................ 7,443 2,043 192
------- ------- ------
TOTAL ASSETS........................................ 388,063 498,036 46,720
======= ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings............................... 674 1,187 111
Accounts payable trade.............................. 49,022 54,908 5,151
Income taxes payable................................ 21,403 31,605 2,965
Deferred tax liability.............................. 130 130 12
Accrued other liabilities........................... 9,729 18,329 1,719
------- ------- ------
TOTAL CURRENT LIABILITIES........................... 80,958 106,159 9,959
Long-term borrowings................................ 4,682 - -
SHAREHOLDERS' EQUITY
$4.00 Series A Convertible Preferred Stock
10,000,000 shares authorized, 7,000,000
shares issued and outstanding....................... - - -
Common Stock, $.001 par value, 100,000,000
shares authorized 27,750,920 and 28,146,531
issued and outstanding at December 31, 2000
and September 30, 2001, respectively................ 8,310 8,313 780
Additional paid-in capital.......................... 88,127 109,917 10,311
Stock dividends to be distributed................... 6,728 11,165 1,047
Retained earnings................................... 199,838 263,357 24,705
Accumulated other comprehensive income.............. (580) (876) (82)
------- ------- ------
TOTAL SHAREHOLDERS' EQUITY.......................... 302,423 391,876 36,761
------- ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... 388,063 498,036 46,720
======= ======= ======
See accompanying notes to consolidated statements.
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PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three-months ended Nine-months ended
September 30, September 30,
(unaudited) (unaudited)
----------------------------- --------------------------------------------
2000 2001 2000 2001 2001
Restated Restated
------------- ------------- ------------- ------------- -----------
SEK SEK SEK SEK USD
(in thousands)
Net sales..................................... 67,408 86,666 184,237 266,883 25,036
Cost of sales................................. 22,848 23,720 74,839 86,683 8,132
------------- ------------- ------------- ------------- -----------
Gross profit.................................. 44,561 62,945 109,397 180,200 16,904
Selling, general and administrative expenses.. 24,350 38,189 66,713 104,763 9,828
------------- ------------- ------------- ------------- -----------
Operating profit.............................. 20,210 24,756 42,684 75,437 7,077
Sale of controlled entity..................... - - - 17,229 1,616
Interest expense.............................. 1,233 - 2,086 1,217 114
Interest income............................... - 526 2,173 942 88
------------- ------------- ------------- ------------- -----------
Income before income tax...................... 18,977 25,282 42,771 92,392 8,667
Income taxes.................................. 2,247 3,034 4,874 17,693 1,660
------------- ------------- ------------- ------------- -----------
Net income.................................... 16,730 22,248 37,897 74,698 7,007
------------- ------------- ------------- ------------- -----------
Other comprehensive income:
Foreign currency adjustments.................. 92 1,322 551 (296) (28)
------------- ------------- ------------- ------------- -----------
Comprehensive income.......................... 16,822 23,570 38,448 74,402 6,980
============= ============= ============= ============= ===========
Income applicable to common shares............ 13,341 18,517 28,389 63,533 5,960
============= ============= ============= ============= ===========
Net income per share:
Basic (restated).............................. 0.49 0.66 1.05 2.27 0.21
============= ============= ============= ============= ===========
Diluted....................................... 0.34 0.45 0.77 1.51 0.14
============= ============= ============= ============= ===========
See accompanying notes to consolidated statements.
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PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-months ended
September 30,
(unaudited)
---------------------------------------------
2000 2001 2001
Restated
------------- ------------- -----------
SEK SEK USD
(in thousands)
Cash flows from operating activities:
Net income..................................................... 37,897 74,698 7,007
Adjustment to reconcile net income to net cash
flows from operating activities:
Deferred Taxes.............................................. (725) - -
Depreciation................................................ 2,815 4,250 399
Stock-based compensation.................................... 150 - -
Tax provision on asset held for sale........................ - 4,000 375
Amortization of goodwill.................................... 1,183 2,156 202
Gain on sale of controlled entity........................... - (17,229) (1,616)
Amortization of photographs and videos...................... 18,668 31,803 2,983
Effects of changes in operating assets and liabilities:
Trade accounts receivable................................... (24,068) (45,495) (4,268)
Related party receivable.................................... (447) (7,268) (682)
Inventories................................................. (11,583) (8,021) (752)
Prepaid expenses and other current assets................... (9,801) (303) (28)
Accounts payable trade...................................... 9,796 5,285 496
Income taxes payable........................................ 2,547 6,202 582
Accrued other liabilities................................... 33 8,600 807
------- ------- -------
Net cash provided by operating activities...................... 26,465 58,678 5,504
Cash flows from investing activities:
Purchase of short-term investments............................. 28,059 2,632
Investment in library of photographs and videos................ 26,180 53,686 5,036
Capital expenditures........................................... 413 5,672 532
Investment in subsidiary....................................... - 9,091 853
Cash from sale of controlled entity............................ - (21,444) (2,012)
Investments in asset held for sale............................. 352 (20,976) (1,968)
Investments in (sale of) other assets.......................... 4,098 (1,187) (111)
Cash acquired in acquisition................................... 673 - -
------- ------- -------
Net cash used in investing activities.......................... 31,716 52,901 4,963
Cash flow from financing activities:
Conversion of stock-options and warrants....................... 8,103 1,707 160
Long-term borrowings (repayments on loans), net................ (1,049) (4,682) (439)
Short-term borrowings (repayments), net........................ (475) 513 48
------- ------- -------
Net cash (used in) provided by financing activities............ 6,579 (2,462) (231)
Foreign currency translation adjustment........................ 550 (296) (28)
------- ------- -------
Net increase in cash and cash equivalents..................... 1,878 3,019 283
Cash and cash equivalents at beginning of the period........... 7,370 14,381 1,349
------- ------- -------
Cash and cash equivalents at end of the period................. 9,248 17,400 1,632
======= ======= =======
Cash paid for interest......................................... 818 852 80
======= ======= =======
Cash paid for taxes............................................ 811 7,492 703
======= ======= =======
See accompanying notes to consolidated statements.
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1. Basis of presentation and accounting policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP") for interim financial information. Accordingly they do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of financial position and results of operations have been included.
Operating results for the nine months period ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on form
10-KSB for the year ended December 31, 2000.
The accompanying financial statements have been presented in Swedish Kronor
("SEK") which is the principal currency in which Private Media Group, Inc.
generate their cash flows.
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of September 30, 2001 and for the nine months then ended
have been translated into United States dollars ("USD") at the rate of SEK 10.66
per USD 1.00 the exchange rate of the Swedish Riksbank on September 30, 2001.
The translations should not be construed as a representation that the amounts
shown could have been, our could be, converted into US dollars at that or any
other rate.
Short term investments
The Company considers highly liquid investments which generally have
insignificant interest rate risk and original maturities of three months or less
to be cash and cash equivalents. Investments with maturities greater than three
months are classified as short-term investments. All of the Company's
investments are classified as available-for-sale and are reported at fair value
with unrealized gains and losses, net of tax, recorded as a component of
comprehensive income included in stockholders' equity. Realized gains and
losses and declines in value judged to be other-than-temporary on available-for-
sale securities are included in investment income. Gross unrealized gains and
losses on short-term investments were not significant at September 30, 2001. The
Company manages its cash equivalents and short-term investments as a single
portfolio of highly marketable securities, all of which are intended to be
available for the Company's current operations.
2. Restatement
As previously reported in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2000, in connection with the preparation of the
Company's 2000 annual financial statements, management of the Company determined
that the previously issued 1996,1998 and 1999
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financial statements required restatement. Certain of the items requiring
restatement also affected certain previously issued interim consolidated
financial statements, including the consolidated financial statements contained
in the Company's Form 10-QSBs for the quarters ended March 31, June 30 and
September 30, 2000. The impact of the restatement on the June 30 and September
30, 2000 net income was a reduction of SEK 2,820 thousand (SEK 0.06 per diluted
share) and SEK 3,748 thousand (SEK 0.08 per diluted share) in each quarter
respectively. Accordingly, the previously issued interim financial statements
for the three and nine months ended September 30, 2000, have been restated.
The Company has revised its previously reported basic earnings per share
presentation for the three and nine month periods ended September 30, 2000,
respectively to properly reflect the issuance of common shares as dividends
earned on its outstanding convertible preferred stock. This had the effect of
reducing previously reported basic earnings per share by SEK 0.13 per share and
SEK 0.35 per share, for the three and nine month periods ended September 30,
2000, respectively. This change had no effect on previously reported diluted
earnings per share in any of these periods.
3. Inventories
Inventories consist of the following:
December 31, September 30,
------------------ -------------------
2000 2001
------------------ -------------------
SEK SEK
(in thousands)
Magazines........................................ 23,585 20,807
Video cassettes.................................. 20,516 24,223
DVDs............................................. 8,210 21,147
Other............................................ 4,366 2,980
------ ------
56,677 69,157
====== ======
4. Transactions
Coldfair Holdings Ltd. acquisition
On January 1, 2001, the Company acquired all of the outstanding shares of
Coldfair Holdings Ltd. ("Coldfair") for total consideration of SEK 13,356,000.
The consideration consisted of 248,889 shares of the Company's common stock. The
excess of the purchase price over the fair market value of the net assets
acquired has resulted in goodwill of SEK 7,760,246.
-5-
The allocation of the purchase price is as follows:
SEK
------------
Current assets.................................. 615,819
Fixed assets and other intangibles.............. 5,580,900
Current liabilities............................. (600,965)
Goodwill........................................ 7,760,246
----------
13,356,000
==========
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the operating results of Coldfair has been included
in the Company's consolidated financial statements since the date of
acquisition. Goodwill is being amortized on a straight line basis over 10 years.
Anton Enterprises, Inc. d.b.a. Private USA acquisition
On April 1, 2001, the Company acquired the inventory and certain contracts
of its U.S. distributor, Anton Enterprises, Inc. d.b.a. Private USA, for a total
consideration of SEK 9,091,250. The consideration consisted of cash payable
quarterly in 12 equal payments. The excess of the purchase price over the fair
market value of the net assets acquired has resulted in goodwill of SEK
4,631,259. Goodwill is being amortized on a straight line basis over 10 years.
The allocation of the purchase price is as follows:
SEK
------------
Current assets.................................. 4,459,991
Goodwill........................................ 4,631,259
---------
9,091,250
=========
The Company's pro forma revenues and net income, assuming these
acquisitions occurred on January 1, 2000 and 2001, respectively would not have
been materially different from reported results.
Sale of controlled entity
On April 8, 2001, the Company's Swedish subsidiary Peach Entertainment
Distribution AB entered into an agreement to sell its interest in Private
Circle, Inc. a company, the activities of which the Company may be deemed to
control for cash of SEK 21,444 thousand. This agreement was consummated on May
3, 2001 and the final consideration paid in cash was SEK 27,139 thousand.
-6-
Through the sale of Private Circle, Inc. the Company realized a net gain of SEK
17,229 thousand.
Sale of land and building
In July, 2001, the Company's Spanish subsidiary Viladalt S.L. entered into
an agreement to sell certain land and building for a consideration of SEK 29.0
million. The sale closed in July, 2001 and the Company received the cash
consideration and repaid related outstanding long-term borrowings of SEK 9.5
million.
-7-
5. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share:
Three-months ended Nine-months ended
September 30, September 30,
------------------------------- -------------------------------
2000 2001 2000 2001
Restated Restated
-------------- -------------- -------------- --------------
Numerator: (SEK in thousands)
Net income (numerator diluted EPS)......... 16,730 22,248 37,897 74,698
============== ============== ============== ==============
Less: Dividends on preferred stock......... 3,389 3,731 9,508 11,165
-------------- -------------- -------------- --------------
Income applicable to common shares
(numerator basic EPS)...................... 13,341 18,517 28,389 63,533
============== ============== ============== ==============
Denominator:
Denominator for basic earnings per share -
Weighted average shares................... 27,173,869 28,142,565 27,110,716 28,032,075
Effect of dilutive securities:
Preferred stock......................... 21,000,000 21,000,000 21,000,000 21,000,000
Common stock warrants and options....... 675,250 463,533 1,027,825 347,625
Stock dividends to be distributed....... 56,395 43,503 56,395 145,421
-------------- -------------- -------------- --------------
Denominator for diluted earnings per share
- weighted average shares and assumed
conversions............................... 48,905,514 49,649,601 49,194,936 49,525,121
============== ============== ============== ==============
Earnings per share (SEK)
Basic................................... 0.49 0.66 1.05 2.27
============= ============== ============== ==============
Diluted................................. 0.34 0.45 0.77 1.51
============= ============== ============== ==============
-8-
6. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
eliminates the use of the pooling-of interests method of accounting for business
combinations and clarifies the criteria used to recognize intangible assets
separately from goodwill in accounting for a business combination under the
purchase method. SFAS 141 is effective for any business combination accounted
for by the purchase method that is completed after June 30, 2001 and this
statement supercedes APB Opinion No. 16 "business Combinations" and related
interpretations.
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). Further separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their expected useful lives with no maximum life specified;
whereas under prior rules a maximum life of 40 years was required.
The amortization provisions of SFAS 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, companies are required to adopt Statement
142 in fiscal years beginning after December 15, 2001 (i.e., January 1, 2002 for
calendar year companies). Early adoption is permitted for companies with fiscal
years beginning after March 15, 2001 provided that their first quarter financial
statements have not been issued. Because of the different transition dates for
goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not.
Adoption of these new standards will have an impact on the Company's
reported goodwill amortization expense and potentially on the carrying value of
goodwill. Goodwill amortization expense for the nine months ended September 30,
2001 amounted to SEK 2,156 thousand, and the net carrying value of goodwill as
of that date was SEK 26,344 thousand.
In August 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 143 "Asset Retirement Obligations" ("SFAS
143") regarding non-temporary removal of long-lived asset from service, whether
by sale, abandonment, recycling or other method of disposal.
Under SFAS 143 qualifying asset retirement obligations resulting from legal
obligations associated with retirement are recorded at present fair value when
the liability is deemed probable,
-9-
which for assets acquired subject to existing retirement obligations will entail
recognition upon acquisition.
The fair present value of the retirement obligations are recorded as an
increase to long-lived assets, which is subsequently amortized using a
systematic and rational allocation method. Under SFAS 143 the retirement
obligation is accreted to future value over time, with the increase in
obligation being recorded as interest expense.
SFAS 143 will become effective the first day of fiscal years beginning after
June 15, 2002, which for the Company will be January 1, 2003, with early
application permitted. The transition impact will be recorded as a cumulative
change in accounting policy as of the beginning of the fiscal year. Management
does not expect that the adoption of SFAS 143 will have a material impact on the
of the Company's results of operations or financial position.
In October 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supercedes Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-
Lived Assets to be Disposed Of ("SFAS 121")" and those sections of Accounting
Principle Board Standard No. 30 "Reporting the Results of Operations" ("APB
30"), related to discontinued operations. The scope of SFAS 144 includes long-
lived assets, or groups of assets, to be held and used as well as those which
are to be disposed of by sale or by other method, but excludes a number of long-
lived assets such as goodwill and intangible assets not being amortized under
the application of SFAS 142. Under SFAS 144 the impairment test methodologies of
SFAS 121 are essentially unchanged as the standard requires testing for
impairment when indicators of impairment are in evidence, and that impairment
losses are recognized only if the assets carrying value is not recoverable
(based on undiscounted cash flows) and the carrying value of the long lived
asset (group) is higher than the fair value.
SFAS 144 is effective the first day of fiscal years beginning after December
15, 2001, which for the Company will be January 1, 2002, with early application
encouraged. Management does not expect that the adoption of SFAS 144 will have
a material impact on the of the Company's results of operations or financial
position.
7. Contingent Liability
In December 1999 the Company received final notification from the Swedish
Tax Authority assessing its subsidiary in Cyprus for the tax years 1995-1998 for
a total amount of SEK 42,000,000 plus fines amounting to SEK 16,800,000 plus
interest. The Company believes the assessment is without merit and is in the
process of appealing the assessment to the Administrative Court in Stockholm.
The final outcome of the appeal is expected to take several years and the
Company has asked for a postponement of payment of the taxes and fees until the
case is settled. No final decision has been given.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
As previously reported in our Annual Report on Form 10-KSB for the year
ended December 31, 2000, in connection with the preparation of our 2000 annual
financial statements, our management determined that the previously issued
1996, 1998 and 1999 financial statements required restatement. Certain of the
items requiring restatement also affected certain previously issued interim
consolidated financial statements, including the consolidated financial
statements contained in our Form 10-QSBs for the quarters ended March 31, June
30 and September 30, 2000.
Accordingly, the previously issued interim financial statements for the
three and nine months ended September 30, 2000, have been restated in this
Report as described in Note 2 to the accompanying Consolidated Financial
Statements to reflect (i) increases in previously reported income tax expense in
both years related to certain intercompany contractual arrangements which affect
the character and amount of taxable income reported in certain countries, and
(ii) increased revenues, operating expenses and interest expense in both years
as a result of the consolidation of two companies, Private Circle, Inc. and
Viladalt S.L., which we may be deemed to have controlled during the periods. All
amounts and percentages in the following discussions reflect the effects of such
restatements.
We have revised our previously reported basic earnings per share
presentation for the three and nine month periods ended September 30, 2000,
respectively to properly reflect the issuance of common shares as dividends
earned on our outstanding convertible preferred stock. This had the effect of
reducing our previously reported basic earnings per share by SEK 0.13 per share
and SEK 0.25 per share, for the three and nine month periods ended September 30,
2000, respectively.
-11-
The change had no effect on previously reported diluted earnings per share in
any of these periods.
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Report.
Results of Operations
Three months ended September 30, 2001 compared to the three months ended
September 30, 2000
Net sales. For the three months ended September 30, 2001, we had net sales
of SEK 86.7 million compared to net sales of SEK 67.4 million for the three
months ended September 30, 2000, an increase of 28.6%. We attribute this change
mainly to an increase in DVD and Internet (subscriptions and licensing) sales.
DVD sales increased 166% to SEK 36.4 million for the three months ended
September 30, 2001. Film sales in videocassette format increased slightly during
the same period. Internet sales for the same period increased 40% to SEK 17.7
million. We attribute the growth in sales of DVDs to the increasing number of
DVD players being sold in all of our markets. We attribute the growth in
Internet subscriptions and sales to the increasing number of people who are able
to connect to the Internet. Sales from DVD and Internet provide additional net
sales from content previously sold on videocassette. We believe that the growth
in DVD and Internet sales will continue through the remainder of 2001.
There was no material change in net sales of magazines and broadcasting
(cable, satellite and hotel-television programming) during the period compared
to the three months ended September 30, 2000.
During the three months ended September 30, 2001, the DVD, Internet and
broadcasting sales, taken as a whole, increased 75%, to SEK 59.0 million
compared to the three months ended September 30, 2000.
In May, 2001 we sold our interest in our subsidiary, Private Circle, Inc.,
which engaged in the design, production and marketing of trendy apparel.
Accordingly, revenues and expenses associated with Private Circle, Inc. did have
a some impact in the third quarter of 2000, but not in 2001.
Cost of Sales. Our cost of sales was SEK 23.7 million for the three months
ended September 30, 2001 compared to SEK 22.8 million for the three months ended
September 30, 2000, an increase of SEK 0.9 million, or 3.8%. The increase was
primarily the result of an increase in sales volume. Cost of sales as a
percentage of sales was 27.4% for the three months ended September 30, 2001, a
reduction
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of 6.5% compared to the three months ended September 30, 2000. This improvement
was the direct effect of lower costs associated with DVD, Internet and
broadcasting sales.
Gross Profit. In the three months ended September 30, 2001, we realized a
gross profit of SEK 62.9 million, or 72.6% of net sales compared SEK 44.6
million, or 66.1% of net sales for the three months ended September 30, 2000.
This represented an increase of 6.5% in gross profit in relation to net sales.
We attribute this increase to increased sales in areas with higher margins such
as DVD, Internet and broadcasting.
Selling, general and administrative expenses. Our selling, general and
administrative expenses were SEK 38.2 million for the three months ended
September 30, 2001 compared to SEK 24.4 million for the three months ended
September 30, 2000, an increase of SEK 13.8 million, or 56.8%. We attribute this
increase to our continued investment in Internet, DVD and broadcasting related
activities and we expect this to continue through 2002.
Operating profit. We reported an operating profit of SEK 24.8 million for
the three months ended September 30, 2001 compared to SEK 20.2 million for the
three months ended September 30, 2000, an increase of SEK 4.5 million, or 22.5%.
We attribute this increase primarily to increased sales and higher margins.
Interest expense. We had no interest expense for the three months ended
September 30, 2001, compared to SEK 1.2 million for the three months ended
September 30, 2000, a decrease of SEK 1.2 million. We attribute this decrease to
payoff of long term debt related to land and building and lower average short-
term borrowings outstanding during the three months ended September 30, 2001,
compared to the three months ended September 30, 2000.
Income taxes. We estimate income taxes for the interim period based on the
effective tax rate expected to be applicable for our full fiscal year. Our
income tax expense was SEK 3.0 million for the three months ended September 30,
2001, compared to SEK 2.2 million for the three months ended September 30, 2000.
We attribute this increase of SEK 0.8 million to increased DVD, Internet and
broadcasting sales, higher margins.
Net income. Our net income was SEK 22.2 million for the three months ended
September 30, 2001, compared to SEK 16.7 million for the three months ended
September 30, 2000. We attribute this increase in net income in 2001 of SEK 5.5
million, or 33%, primarily to increased DVD, Internet and broadcasting sales,
higher margins from these sales.
-13-
Nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000
Net sales. For the nine months ended September 30, 2001, we had net sales of
SEK 266.9 million which compared to net sales of SEK 184.2 million for the nine
months ended September 30, 2000 represents an increase of 44.9%. We attribute
this change mainly to an increase in DVD, Internet (subscriptions and licensing)
and broadcasting (cable, satellite and hotel-television programming) sales.
Sales from broadcasting increased 51% to SEK 19.2 million compared to the nine
months ended September 30, 2000. DVD sales increased 156% to SEK 84.4 million
for the nine months ended September 30, 2001. Film sales in videocassette
format increased slightly during the same period. Internet sales for the same
period increased 81% to SEK 55.3 million. We attribute the growth in sales of
DVDs to the increasing number of DVD players being sold in all of our markets.
We attribute the growth in broadcasting sales to the growing digital satellite
and cable television market. We attribute the growth in Internet sales to the
increasing number of people who are able to connect to the Internet. Sales from
broadcasting, DVD and Internet provided additional net sales from content
previously sold on videocassette. We believe that the growth in broadcasting,
DVD and Internet sales will continue through the remainder of 2001.
Net sales of magazines remained approximately the same during period
compared to the nine months ended September 30, 2000.
During the nine months ended September 30, 2001, the DVD, Internet and
broadcasting sales, taken as a whole, increased 108%, to SEK 158.9 million
compared to the nine months ended September 30, 2000.
In May, 2001 we sold our interest in our subsidiary, Private Circle, Inc.,
which engaged in the design, production and marketing of trendy apparel.
Accordingly, revenues and expenses associated with Private Circle, Inc. did not
have a significant impact in the second and third quarter of 2001. Also, during
the second quarter of 2001 we acquired the assets of Private USA, our North
American distributor. As a result of the change in ownership, revenues
associated with Private USA during this quarter declined and operations were
briefly suspended, causing a temporary decline in revenues from North American
distribution activities. Our distribution activities in North America are now
operating normally.
Cost of Sales. Our cost of sales was SEK 86.7 million for the nine months
ended September 30, 2001 compared to SEK 74.8 million for the nine months ended
September 30, 2000, an increase of SEK 11.8 million, or 15.8%. The increase was
primarily the result of an increase in sales volume. Cost of sales as a
percentage of sales was 32.5% for the nine months ended September 30, 2001 a
reduction of 8.1% compared to the nine months ended September 30, 2000. This
improvement was the direct result of lower costs associated with DVD, Internet
and broadcasting sales.
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Gross Profit. In the nine months ended September 30, 2001, we realized a
gross profit of SEK 180.2 million, or 67.5% of net sales, compared to SEK 109.4
million, or 59.4% of net sales for the nine months ended September 30, 2000.
This represented an increase of 8.1% in gross profit in relation to net sales.
We attribute this increase to increased sales in areas with higher margins such
as DVD, Internet and broadcasting.
Selling, general and administrative expenses. Our selling, general and
administrative expenses were SEK 104.8 million for the nine months ended
September 30, 2001 compared to SEK 66.7 million for the nine months ended
September 30, 2000, an increase of SEK 38.0 million, or 57.0%. We attribute this
increase to our continued investment in Internet, DVD and broadcasting related
activities and we expect this to continue through 2002.
Operating profit. We reported an operating profit of SEK 75.4 million for
the nine months ended September 30, 2001 compared to SEK 42.7 million for the
nine months ended September 30, 2000, an increase of SEK 32.8 million, or 76.7%.
We attribute this increase primarily to increased sales and higher margins.
Sale of controlled entity. We reported a net gain of SEK 17.2 million for
the nine months ended September 30, 2001 for the sale of our subsidiary, Private
Circle, Inc.
Interest expense. Our interest expense was SEK 1.2 million for the nine
months ended September 30, 2001, compared to SEK 2.1 million for the nine months
ended September 30, 2000, a decrease of SEK 0.9 million. We attribute this
decrease to payoff of long term debt related to land and building and lower
average short-term borrowings outstanding during the nine months ended September
30, 2001, compared to the nine months ended September 30, 2000.
Income taxes. We estimate income taxes for the interim period based on the
effective tax rate expected to be applicable for our full fiscal year. Our
income tax expense was SEK 17.7 million for the nine months ended September 30,
2001, compared to SEK 4.9 million for the nine months ended September 30, 2000.
We attribute this increase of SEK 12.8 million to increased DVD, Internet and
broadcasting sales, higher margins and a one-time tax provision of SEK 4.0
million relating to the sale of certain land and building.
Net income. Our net income was SEK 74.7 million for the nine months ended
September 30, 2001, compared to SEK 37.9 million for the nine months ended
September 30, 2000. We attribute this increase in net income in 2001 of SEK 36.8
million, or 97.1%, primarily to increased DVD, Internet and broadcasting sales,
higher margins from these sales and the net gain on the sale of the Private
Circle, Inc. subsidiary.
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Liquidity and Capital Resources
We reported a working capital surplus of SEK 212.5 million at September 30,
2001, an increase of SEK 72.0 million compared to the year ended December 31,
2000. The increase is principally attributable to increased short-term
investments, accounts receivable and inventories offset by accounts payable
trade, income taxes payable and accrued other liabilities.
Operating Activities
Net cash provided by operating activities was SEK 58.7 million for the nine
months ended September 30, 2001, 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 74.7 million and adjustments to reconcile net income to
net cash flows from operating activities, representing depreciation of SEK 4.3
million, tax provision on asset held for sale of SEK 4.0 million, amortization
of goodwill of SEK 2.2 million, and amortization of photographs and videos of
SEK 31.8 million offset by gain on sale of controlled entity of SEK 17.2
million, provided a total of SEK 99.7 million. The total of SEK 99.7 million was
then primarily reduced by the increases in trade accounts receivable, related
party receivable, inventories and prepaid expenses and other current assets and
totaling SEK 61.1 million, offset by SEK 20.1 million from accounts payable
trade, income taxes payable and accrued other liabilities. Net cash provided by
operating activities was SEK 26.5 million for the nine months ended September
30, 2000. The increase in cash provided by operating activities for the nine
months ended September 30, 2001 is principally the result of net income and
adjustments to reconcile net income to net cash flows from operating activities.
Investing Activities
Net cash used in investing activities for the nine months ended
September 30, 2001 was SEK 52.9 million. The investing activities were
principally investment in library of photographs and videos of SEK 53.7 million,
which are carried out in order to maintain the 2001 and 2002 release schedules
for both video and DVD. In addition to investment in library of photographs and
videos, SEK 28.1 million was invested in short-term investments, SEK 5.7 million
in capital expenditures, SEK 9.1 million in investment in subsidiary and offset
by SEK 21.4 million from cash from sale of controlled entity, SEK 21.0 million
from asset held for sale and SEK 1.2 million from other assets. The increase
over the comparable nine-month 2000 period is principally due to increased
short-term investments as a result of cash received from sale of controlled
entity, investments in library of photographs and videos in order to maintain
inventory levels and expand DVD activities and investments in subsidiary
represented primarily by the acquisition of assets from Private USA to be
invested in our proprietary distribution operation in the U.S.
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Financing Activities
Net cash used in financing activities for the nine months ended
September 30, 2001 was SEK 2.5 million, represented primarily by repayments of
long-term borrowings offset by conversion of warrants. The decrease over the
comparable nine-month 2000 period is primarily due to repayments of borrowings
offset by less conversion of warrants.
We expect that our available cash resources and cash generated from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements for at least the next 12 months. However,
we may need to raise additional funds to support more rapid expansion or respond
to unanticipated requirements. If additional funds are raised through the
issuance of equity securities, our shareholders' percentage ownership will be
reduced, they may experience additional dilution, or these newly issued equity
securities may have rights, preferences, or privileges senior to those of our
current shareholders. Additional financing may not be available when needed on
terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, we may be unable to develop or enhance our
products and services, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could harm our
business.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We transact our business in various foreign currencies and, accordingly, we
are subject to exposure from adverse movements in foreign currency exchange
rates. The principal currencies in which our revenues and expenses are incurred
are the Swedish Kronor, various Euro-zone currencies and the U.S. dollar. To
date, the effect of changes in foreign currency exchange rates on revenues and
operating expenses has not been material.
We do not use financial instruments or derivatives to hedge our operations
in foreign currencies or for speculative trading purposes.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIVATE MEDIA GROUP, INC.
(Registrant)
Date: November 13, 2001 /s/ Johan Gillborg
--------------------------------------------
Johan Gillborg
Chief Financial Officer
(Principal Financial and Accounting Officer)
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