<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 1998
[_] 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 333-62075
PRIVATE MEDIA GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 87-0365673
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Carrettera de Rubi 22-26
San Cugat del Valles, Barcelona, Spain 08190
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 34-93-590-7070
--------------
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 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
equity, as of the latest practicable date.
Class Outstanding at December 21, 1998
----- --------------------------------
Common Stock, par value 8,081,669
$ .001
<PAGE>
PART I. FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared by Private Media Group, Inc. (the "Company"), without audit, in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC"). As contemplated by the SEC under Rule 10-01 of Regulation
S-X, the accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form SB-2 filed with the SEC (SEC File No.
333-62075).
See accompanying notes to consolidated financial statements.
<PAGE>
PRIVATE MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
(UNAUDITED)
----------- ------------------
1997 1998 1998
----------- -------- --------
SEK SEK USD
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents..................................... 3,698 2,934 373
Trade accounts receivable..................................... 47,632 48,783 6,206
Inventories - net (Note 2).................................... 20,497 35,012 4,454
Prepaid expenses and other current assets..................... 4,174 17,682 2,250
------- ------- ------
TOTAL CURRENT ASSETS.......................................... 76,001 104,411 13,284
Library of photographs and videos - net....................... 67,577 81,292 10,342
Property, plant and equipment - net........................... 6,998 8,989 1,144
Other assets.................................................. 12,112 15,327 1,950
------- ------- ------
TOTAL ASSETS.................................................. 162,688 210,020 26,720
======= ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings......................................... 1,604 - -
Accounts payable trade........................................ 20,009 22,031 2,803
Income taxes payable.......................................... 859 479 61
Deferred tax liability........................................ 252 252 32
Accrued other liabilities..................................... 4,440 15,024 1,911
------- ------- ------
TOTAL CURRENT LIABILITIES..................................... 27,164 37,786 4,807
Long-term borrowings.......................................... 723 394 50
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, 50,000,000..................... 7,992 7,997 1,017
shares authorized, 8,081,669
issued and outstanding
Additional paid-in capital.................................... - 731 93
Retained earnings............................................. 126,809 161,453 20,541
Accumulated other comprehensive income........................ - 1,658 211
------- ------- ------
TOTAL SHAREHOLDERS' EQUITY.................................... 134,801 171,839 21,863
------- ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................................................ 162,688 210,020 26,720
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
------------------ -------------------------
1997 1998 1997 1998 1998
-------- -------- -------- -------- -------
SEK SEK SEK SEK USD
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales....................................................... 35,660 28,874 106,095 128,060 16,293
Cost of sales................................................... 22,500 13,141 53,670 59,820 7,611
------ ------ ------- ------- ------
Gross profit.................................................... 13,160 15,733 52,425 68,239 8,682
Selling, general and administrative expenses.................... 9,617 9,128 25,554 33,105 4,212
------ ------ ------- ------- ------
Operating profit................................................ 3,543 6,605 26,872 35,134 4,470
Interest expense................................................ 38 115 128 374 48
Interest income................................................. 14 12 35 136 17
------ ------ ------- ------- ------
Income before income tax........................................ 3,519 6,502 26,779 34,896 4,440
Income taxes.................................................... 0 42 443 252 32
------ ------ ------- ------- ------
Net income...................................................... 3,519 6,460 26,336 34,644 4,408
------ ------ ------- ------- ------
Other comprehensive income:
Foreign currency adjustments.................................... 234 1,547 443 1,658 211
------ ------ ------- ------- ------
Comprehensive income............................................ 3,753 8,007 26,779 36,302 4,619
====== ====== ======= ======= ======
Net income per share:
Basic........................................................... 0.47 0.80 3.51 4.29 0.55
====== ====== ======= ======= ======
Diluted......................................................... 0.23 0.41 1.73 2.22 0.28
====== ====== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine-months ended
September 30,
(unaudited)
----------------------------
1997 1998 1998
------- ------- ------
SEK SEK USD
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ 26,336 34,644 4,408
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH
FLOWS FROM OPERATING ACTIVITIES:
Deferred taxes................................................. - - -
Depreciation................................................... 948 3,448 439
Amortization of photographs and videos......................... 12,144 11,516 1,465
EFFECTS OF CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade accounts receivable..................................... (10,276) (1,151) (146)
Inventories.................................................. (4,691) (14,515) (1,847)
Prepaid expenses and other current assets.................... (4,007) (13,508) (1,719)
Accounts payable trade....................................... (3,233) 2,022 257
Income taxes payable........................................ (503) (380) (48)
Accrued other liabilities.................................... 1,698 10,584 1,347
------- ------- ------
Net cash provided by operating activities......................... 18,416 32,660 4,155
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in library of photographs and videos................... 14,288 25,231 3,210
Capital expenditures.............................................. 1,643 5,439 692
Investments in other assets....................................... 2,986 3,215 409
Cash acquired in reverse acquisition.............................. - - -
------- ------- ------
Net cash used in investing activities............................. 18,908 33,885 4,311
CASH FLOW FROM FINANCING ACTIVITIES:
Additional paid in capital........................................ - 736 94
Long-term repayments.............................................. - (329) (42)
Short-term borrowings (repayments)................................ (816) (1,604) (204)
------- ------- ------
Net cash (used in) provided by financing activities............... (816) (1,197) (152)
Foreign currency translation adjustment........................... 808 1,658 211
------- ------- ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (500) (764) (97)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD.............. 3,445 3,698 470
------- ------- ------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.................... 2,945 2,934 373
======= ======= ======
Cash paid for interest............................................ 97 229 38
======= ======= ======
Cash paid for taxes............................................... 156 224 28
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1. BASIS OF PRESENTATION
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation of financial
position and results of operations of Private Media Group, Inc. (the "Company")
and its subsidiaries have been included. Operating results for the nine months
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998.
The accompanying financial statements have been presented in Swedish Kronor
(SEK") which is the principal currency in which the Company generates its cash
flows.
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of September 30, 1998 and for the nine months then ended
have been translated into United States dollars ("USD") at the rate of SEK 7.86
per USD 1.00, the exchange rate of the Swedish Riksbank on September 30, 1998.
The translations should not be construed as a representation that the amounts
shown could have been, or could be, converted into US dollars at that or any
other rate.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
1997 1998
------------ ------------
SEK SEK
(IN THOUSANDS)
<S> <C> <C>
Magazines............................. 12,355 19,032
Video cassettes....................... 6,342 11,938
Other................................. 1,800 4,041
------ ------
20,497 35,012
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report may contain forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such statements. Certain factors could also cause actual
results to differ materially from those discussed in such forward-looking
statements, including factors discussed in the Company's Form SB-2 filed with
the SEC on November 13, 1998 (SEC File No. 333-62075).
RESULTS OF OPERATIONS
Three months ended September 30, 1998 compared to the three months ended
September 30, 1997
Net sales. The Company reported net sales of SEK 28.9 million for the
three months ended September 30, 1998 which, compared to net sales of SEK 35.7
million for the three months ended September 30, 1997, represents a decrease of
SEK 6.8 million, or 9.6%. The decrease was primarily attributable to the
absence of the one time sales at reduced margins of certain of the Company's
products that took place in 1997.
Cost of Sales. The Company reported cost of sales of SEK 13.1 million for
the three months ended September 30, 1998 which, compared to cost of sales of
SEK 22.5 million for the three months ended September 30, 1997, represents a
decrease of SEK 9.4 million, or 30.0%. The gross profit for the three months
ended September 30, 1998 was SEK 15.7 million or 54.5% of net sales which,
compared to gross profit for the three months ended September 30, 1997 of SEK
13.2 million, or 36.9% of net sales, represents an increase of 17.6% in gross
profit in relation to net sales. This increase is the result of product mix and
the absence of the one time sales at reduced margins of certain of the
Company's products that took place in 1997.
Selling, general and administrative expenses. The Company reported
selling, general and administrative expenses of SEK 9.1 million for the three
months ended September 30, 1998 which, compared to selling, general and
administrative expenses of SEK 9.6 million for the three months ended September
30, 1997, represents a decrease of SEK 0.5 million, or 3.1%.
Interest expense. The Company reported interest expense of SEK 0.12
million for the three months ended September 30, 1998 which, compared to
interest expense of SEK 0.04 million for the three months ended September 30,
1997, represents an increase of SEK 0.08 million. The small increase is the
result of higher average short-term borrowings outstanding in 1998 compared to
1997.
Income taxes. The Company reported income tax of SEK 0.04 million as
compared to an income tax expense of SEK 0.0 million for the three months ended
September 30, 1997.
Net income. The Company reported net income of SEK 6.46 million as
compared to SEK 3.52 million for the three months ended September 30, 1997. The
increase in net income for 1998 of SEK 2.94 million, or 83.6% was primarily
attributable to improved profit margins.
<PAGE>
Nine months ended September 30, 1998 compared to the nine months ended September
30, 1997
Net sales. The Company reported net sales of SEK 128.1 million for the
nine months ended September 30, 1998 which, compared to net sales of SEK 106.1
million for the nine months ended September 30, 1997, represents an increase of
SEK 22.0 million, or 20.7%. The increase was primarily attributable to
increased video sales due to two factors: a higher output of new video releases,
46 titles in 1998 compared to 30 titles in 1997; and an increase in the number
of video titles available for back-catalogue sales. Sales of magazines and CD-
ROM remained approximately the same in 1998 as in 1997.
Cost of Sales. The Company reported cost of sales of SEK 59.8 million for
the nine months ended September 30, 1998 which, compared to cost of sales of SEK
53.7 million for the nine months ended September 30, 1997, represents an
increase of SEK 6.2 million, or 11.5%. The gross profit for the nine months
ended September 30, 1998 was SEK 68.2 million, or 53.3% of net sales which,
compared to gross profit for the nine months ended September 30, 1997 of SEK
52.4 million, or 49.4% of net sales, represents an increase of 3.9% in gross
profit in relation to net sales. The gross profit percentage for the nine-month
period ended September 30, 1998 is higher that the gross profit percentage for
the year ended December 31, 1997 principally as a result of the one time sales
at reduced margins of certain of the Company's products that took place in the
Fall of 1997.
Selling, general and administrative expenses. The Company reported
selling, general and administrative expenses of SEK 33.1 million for the nine
months ended September 30, 1998 which, compared to selling, general and
administrative expenses of SEK 25.6 million for the nine months ended September
30, 1997 represents an increase of SEK 7.6 million, or 29.6%. The increase was
attributable to non-recurring moving and organization expenses related to the
relocation of several departments of the Swedish subsidiary to the subsidiary in
Spain, non-recurring expenses associated with the planned registration of the
Company on NASDAQ and the Company's investment in Internet related activities.
The relocation is expected to be completed during 1998. The investment expenses
associated with Internet activities are expected to continue in 1998.
Internet expense. The Company reported interest expense of SEK 0.37
million for the nine months ended September 30, 1998 which, compared to interest
expenses of SEK 0.13 million for the nine months ended September 30, 1998 which,
compared to interest expense of SEK 0.13 million for the nine months ended
September 30, 1997, represents an increase of SEK 0.24 million. The small
increase is the result of higher average short-term borrowings outstanding in
1998 compared to 1997.
Income taxes. The Company reported income tax expense of SEK 0.25 million
as compared to an income tax expense of SEK 0.44 million for the nine months
ended September 30, 1997.
Net income. The Company reported net income of SEK 34.6 million as
compared to SEK 26.3 million for the nine months ended September 30, 1997. The
increase in net income in 1998 of SEK 8.3 million, or 31.5% was primarily
attributable to increased sales and improved profit margins.
LIQUIDITY & CAPITAL RESOURCES
The Company reported a working capital surplus of SEK 66.6 million at
September 30, 1998, an increase of SEK 17.8 million compared to the year ended
December 31, 1997. The increase is principally
<PAGE>
attributable to increased prepaid expenses and other current assets and
increased inventories.
Net cash provided by operating activities for the nine months ended
September 30, 1998 was SEK 32.7 million. The increase over the comparable nine-
month 1997 period was principally due to the increase in net income.
Net cash used in investing activities for the nine months ended September
30, 1998 was SEK 33.9 million. The increase over the comparable nine month 1997
period was principally due to increased investments in library of photographs
and videos to support the Company's increased sales.
Net cash used in financing activities for the nine months ended September
30, 1998 was SEK 1.2 million. The increase over the comparable nine month 1997
period was due to increased repayments of short-term borrowings and long-term
borrowings from the excess cash balances offset by additional paid in capital.
The Company has historically relied on positive cash flows from operations
to finance working capital needs and investing activities. The Company expects
to have adequate working capital for the next twelve months. During this period
the Company intends to rely on positive cash flows from operations to finance
working capital needs and necessary investing activities. The Company's long-
term expansion plans will require additional sources of funding. The Company
plans to meet these funding requirements through a combination of increases in
short-term credit lines, additional long-term borrowings and/or equity
financing.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
EX-27 - Financial Data Schedule
b. Reports on Form 8-K:
None.
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: December 21, 1998 By: /s/ Johan Gillborg
-----------------------------------
Johan Gillborg
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
EX-27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> SWEDISH KRONA
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> .12723 .12723
<CASH> 0 2,934
<SECURITIES> 0 0
<RECEIVABLES> 0 48,783
<ALLOWANCES> 0 0
<INVENTORY> 0 35,012
<CURRENT-ASSETS> 0 104,411
<PP&E> 0 8,989
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 210,020
<CURRENT-LIABILITIES> 0 37,786
<BONDS> 0 0
0 0
0 0
<COMMON> 0 7,997
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 210,020
<SALES> 28,874 128,060
<TOTAL-REVENUES> 28,874 128,060
<CGS> 13,141 59,820
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 9,128 33,105
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 115 374
<INCOME-PRETAX> 6,502 34,896
<INCOME-TAX> 42 252
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,460 34,644
<EPS-PRIMARY> .80 4.29
<EPS-DILUTED> .41 2.22
</TABLE>
