Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended...........................December 31, 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.
(Name of Registrant as specified in its Charter)
Nevada 87-0365673
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Carretera de Rubi 22-26, 08190 Sant Cugat del Valles,
Barcelona, Spain
(Address of principal executive offices)
34-93-590-7070
--------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value.
Indicate by check mark whether the registrant (1)has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
---
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At April 12, 2002, the aggregate market value of the voting stock and
non-voting common equity held by non-affiliates of the registrant was
$97,386,431. The aggregate market value has been computed by reference to the
last sales price of the common stock on April 12, 2002. On such date the
registrant had 28,426,152 shares of Common Stock outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Report includes forward-looking statements. Statements other than
statements of historical fact included in this Report, including the statements
under the headings "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere in this Report regarding
future events or prospects, are forward-looking statements. The words "may,"
"will," "expect," "anticipate," "believe," "estimate," "plan," "intend,"
"should" or variations of these words, as well as other statements regarding
matters that are not historical fact, constitute forward-looking statements. We
have based these forward-looking statements on our current view with respect to
future events and financial performance. These views involve a number of risks
and uncertainties which could cause actual results to differ materially from
those we predict in our forward-looking statements and from our past
performance. Although we believe that the estimates and projections reflected in
our forward-looking statements are reasonable, they may prove incorrect, and our
actual results may differ, as a result of the following uncertainties and
assumptions:
. our business development, operating development and financial
condition;
. our expectations of growth in demand for our products and services;
. our expansion and acquisition plans;
. the impact of expansion on our revenue potential, cost basis and
margins;
. the effects of regulatory developments and legal proceedings on our
business;
. the impact of exchange rate fluctuations; and
. our ability to obtain additional financing.
We do not intend to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise except to the
extent required by law. You should interpret all subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf as
being expressly qualified by the cautionary statements in this Report. As a
result, you should not place undue reliance on these forward-looking statements.
THE COMPANY
OVERVIEW
We are a leading international provider of high quality adult media
content for a wide range of media platforms. We acquire still photography and
motion pictures tailored to our specifications from independent directors and
process these images into products suitable for popular media formats such as
print publications, DVDs, videotapes and electronic media content for Internet
distribution. We distribute our adult media content directly, and through a
network of local affiliates and independent distributors, through multiple
channels, including (1) newsstands and adult bookstores, (2) mail order
catalogues, (3) cable, satellite and hotel television programming and (4) over
the Internet via proprietary websites and evolving broadband delivery services.
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. In the fiscal year ended December 31, 2001, we had net sales of SEK
360.6 million and net income of SEK 74.2 million.
Our business was founded in 1965 and achieved initial success through
our flagship publication, Private, the first full color, hard-core sex
publication in the world. Today, we produce four X-rated periodical magazines:
Private, Pirate, Triple X and Private Sex, as well as several special feature
publications each year. As of December 31, 2001, we had compiled a digital
archive of more than two million photographs and all of our 337 print
publications. We expect to add two additional issues and hundreds of photographs
each month to this archive. Approximately 300,000 copies of our print
publications are distributed each month at an average retail price of
approximately Euro 11.50. We distribute our publications through a network of
approximately 250,000 points of
- 2 -
sale in more than 35 countries, with strong market positions in Europe, Latin
America, Australia and Canada. We believe that our distribution network has the
potential to reach nearly 500,000 points of sale in our existing markets.
Since 1992, we have also acquired, processed and distributed adult
motion picture entertainment. We acquire motion pictures that meet our exacting
standards for entertainment content and production value from independent
directors, either under exclusive contracts or on a freelance basis. We then
edit and process these motion pictures to ensure consistent image quality and
prepare and customize them for distribution in several formats, including DVDs,
videocassettes, broadcasting, which includes cable, satellite and hotel
television programming, and the Internet. Our proprietary motion pictures and
those produced by joint ventures in which we participate have received 61
industry awards since 1994, evidencing our success in setting high quality
standards for our industry. As of December 31, 2001, our movie library contained
462 titles. We expect to add approximately 136 additional titles in 2002.
Since 1997, we have expanded our presence in emerging electronic
markets for adult media content, such as the Internet, DVDs and broadcasting. We
believe that these markets comprise the fastest growing segment of the adult
entertainment industry. We launched our first Internet website, www.private.com,
in 1997. In 1999, we launched two additional websites, www.privatecinema.com and
www.privatelive.com. We also generate incremental sales by licensing our
trademarks and proprietary adult media content for use on the websites of other
companies.
We license our content to cable and satellite television operators as
well as to hotels. We have also launched two television channels, Private Gold
and Private Blue, that broadcast our content. Consumers pay for these products
either on a pay-per-view basis or by subscription.
In May 2001, we launched our www.privatespeed.com website to deliver
our proprietary motion pictures to our customers using broadband connections
over the Internet. This website utilizes advanced networking technology to
furnish customers with instant access to our motion picture archive by buying
blocks of viewing time. We are also preparing to distribute our adult media
content through fixed and third generation mobile telecommunications
technologies. While broadband and other high-speed Internet and telephonic
connections are in their infancy, we believe that these technologies represent a
substantial growth opportunity for us in the future.
We operate in a highly regulated industry. This requires us to be
socially aware and sensitive to government strictures, including laws and
regulations designed to protect minors and to prohibit the distribution of
obscene material. We take great care to comply with all applicable governmental
laws and regulations in each jurisdiction where we conduct business. Moreover,
we do not knowingly engage the services of any business or individual that does
not adhere to the same standards. Since 1965, we have never been held to have
violated any laws or regulations regarding obscenity or the protection of
minors.
Our principal executive office is located at Carretera de Rubi 22-226,
08190 Sant Cugat del Valles, Barcelona, Spain, telephone 34-93-590-7070. In
accordance with Nevada law we maintain a registered office at 3230 Flamingo
Road, Suite 156, Las Vegas, Nevada.
Any reference in this Report to "we," "us" or "Private Media Group"
refers to Private Media Group, Inc. and its consolidated subsidiaries. Milcap
Media Group refers to Milcap Media Group SL (Spain) and Milcap Media Limited
refers to Milcap Media Limited (Cyprus).
Private, Private Media, our Private logo, Pirate, Triple-X, Triple-X
Files, Private Black Label, Private XXX, Gaia, Private Sex, Private Life,
Private Style, www.privatespeed.com, Private Gold, Private Blue,
www.private.com, www.prvt.com, www.privatecinema.com, www.privatelive.com,
www.privategold.com, www.privatechannels.com, www.sexclub.sex.se,
www.privateusa.com, www.private.com.ar, www.private.com.au, www.maxs.se,
www.sex.se, www.clubx.com.au, and www.privategold.com are some of our trademarks
and trade
- 3 -
names. Other marks used in this Report are the property of their owners, which
includes us in some instances. Information on these websites is not a part of
this Report.
MARKET OPPORTUNITY
Demand for adult entertainment products has grown substantially in
recent years. We believe that the total worldwide adult entertainment market
exceeds $56 billion annually. Of this market, we believe that our target market,
including print publications, videocassettes, DVDs, broadcasting and the
Internet, comprises more than $40 billion. We believe that two principal factors
are driving growth in our industry: the relaxation of social and legal
restrictions on distribution of adult entertainment products and new
technologies that facilitate the distribution of high quality adult media
content to consumers in the privacy of their own homes. As a result of
liberalized regulation of adult entertainment products, we now distribute our
products in physical form in more than 35 countries worldwide with an aggregate
current population of 1.1 billion, as compared to six European countries with a
population of 144 million when the current management took over in 1991. We
expect this liberalizing trend to continue, which should expand our potential
markets further in the future.
The proliferation of easy to use electronic equipment, such as VCRs and
DVD players, which allow consumers to view high quality video products in the
privacy of their home, has boosted demand for adult media content compatible
with these formats. For example, the installed base of DVD players in Western
Europe and the United States doubled in 2001. Also, the evolution of the
Internet as a channel of commerce and content distribution has stimulated
additional demand for adult media content. In addition, advances in cable,
satellite and hotel communications systems furnish another relatively new
channel for the delivery of media content, including adult entertainment, into
private homes, hotels and businesses.
We expect these regulatory and technological developments to fuel
increasing demand worldwide for adult media content of all kinds, including
demand for products in our market niche for explicit, unrated adult media
content. In addition, we believe that market demand for content to fill new
media outlets will lead mainstream media content providers to seek still more
adult media content in the future. We expect that the high quality standards of
the mainstream media, technological demands of multiple delivery formats and
global marketing and distribution costs will increase capital requirements for
providers of adult media content. While the adult entertainment industry is
currently characterized by a large number of relatively small producers and
distributors, we believe that the factors discussed above will cause smaller,
thinly capitalized producers to seek partners or exit the adult entertainment
business, leading to a consolidation of the adult entertainment industry.
OUR COMPETITIVE STRENGTHS
We believe the following strengths, among others, will enable us to
exploit the growing global market for adult entertainment:
Extensive library of high quality adult media content
We have an extensive library of high quality adult media content. As of
December 31, 2001, our library included still photographs developed for more
than 300 back-issues of magazines and more than 400 motion pictures. We hold
exclusive worldwide rights to this entire content archive. This has enabled us
to enter into global distribution arrangements with a wide range of media
content providers, including leading international companies. To facilitate
electronic distribution of our products, we have converted our entire archive of
print images into a digital format. We are currently digitizing our motion
picture archive as well, and have now stored more than 50% of our existing
motion pictures in digital form. We believe that this electronic archive
constitutes one of the largest libraries of high quality adult media content in
the world.
Recognized brand name
- 4 -
We believe that our target customers associate the Private brand name
with high quality adult entertainment products and services. This name
recognition attracts leading producers of adult media content, as well as
distributors and prospective joint venture partners interested in working with
Private Media Group. We believe that the strength of our brand name leads to
more favorable economic terms than we could otherwise obtain in our processing
and distribution contracts, and enables us to negotiate favorable revenue
sharing arrangements and joint ventures from which we derive significant
licensing fees and royalty income. We have entered into joint venture and
co-branding agreements with leading participants in our industry and other
related industries, including Playboy and Penthouse. We seek to strengthen
awareness of our brand name by consistently featuring the Private label
prominently in our product packaging, cross-promoting our own products,
selectively sponsoring athletes and distributing under the Private label
complementary or ancillary non-media products that are consistent with an adult
entertainment lifestyle. We believe that these activities engender a loyal
customer base which, in turn, enables us to grow even with relatively modest
external advertising and marketing expenditures.
Established market position and distribution network
We have a well-established worldwide distribution network which has
been built up over the past 35 years, including some 250,000 points of sale in
over 35 countries as of December 31, 2001. In many markets, we believe that our
established presence hinders our competitors' ability to break into the market.
In some cases, exclusive distribution agreements improve our market position
further. This broad distribution network provides an effective channel to
introduce new products and services and new formats for existing products and
services. For example, we were able to utilize our existing video distribution
channels to reach customers with our DVD-based products. In electronic media
categories, we have entered into strategic alliances with a number of leading
service providers, such as Terra/Lycos and T-Online, to facilitate widespread
distribution. In addition, we have assembled an internal team of Internet
specialists to maintain and improve our Internet infrastructure and electronic
products and services. We believe that our broad, multi-format distribution
network affords our customers convenient access to high quality adult media
content in the format of their choice.
Flexible operating structure and access to substantial capital
We acquire adult media content from third-party directors on a project
basis. This approach gives us substantial flexibility in terms of production
volume and delivery time, significantly reduces our fixed production overhead
and largely eliminates the risk to us of cost overruns in production. Because of
our multiple product and service formats and broad distribution network, we can
afford to hire top directors in the industry, which we believe results in a
higher quality product for our customers. Similarly, we reduce our fixed
processing costs by outsourcing editing and duplication functions for most of
our products, although we retain oversight of the overall production process for
cost and quality control purposes. As a public company with access to the
capital markets and, in recent years, significant operating cash flow, we
believe that we will have sufficient financial resources to increase our
production and grow through acquisitions without sacrificing our high quality
standards.
Experienced professional management
Our management team has extensive experience in the production and
distribution of adult media content and in general business administration.
Berth H. Milton, our Chief Executive Officer, has extensive knowledge of our
industry and has successfully founded and developed other profitable businesses.
Other members of our management team have broad expertise in content production,
sales and marketing, technology and finance, and have contributed to our record
of growth in our core business and in acquiring and integrating companies in
related businesses.
OUR STRATEGY
Our vision is to be the world's preferred content provider of adult
entertainment to consumers anywhere, at any time and across all distribution
platforms and devices. We have developed the strategies described below to
- 5 -
increase sales and operating margins while maintaining the quality of our
products and services and the integrity of our brand name.
Develop strategic alliances and joint ventures with businesses outside
of the adult entertainment industry to broaden our distribution channels. We are
entering into strategic alliances and joint ventures with leading media
companies outside of the adult entertainment industry to distribute our adult
media content for use on popular and newly developing media formats, including
revenue sharing relationships with cable and satellite television operators and
Internet service providers with significant market positions. We expect these
initiatives to widen the scope of our distribution network, enabling us to reach
new customers while supplying our partners and licensees with content.
To be at the forefront of the adult entertainment industry in adapting
new technology and distribution channels such as broadband distribution of our
motion pictures. By actively seeking out and utilizing advanced technologies to
distribute our content such as DVDs, broadband, Internet and cable and satellite
television, we expect to increase revenues with minimal incremental cost. For
example, we have recently launched a streaming video, or video-on-demand,
product that exploits broadband technology over our new privatespeed.com website
to deliver high quality adult media content directly to customers via the
Internet. We believe that this broadband technology, in particular, offers us a
significant opportunity to increase our net sales and operating margins and
simplify our distribution chain. In addition, we were one of the first adult
entertainment companies to embrace the DVD format.
Increase market share through strategic acquisitions. The adult
entertainment industry is currently fragmented and consolidating. We expect this
trend to continue as small, privately owned companies seek to exit from the
business. We plan to expand our market presence and increase our market share by
acquiring local distributors in the markets in which we compete. In addition, we
may seek to acquire existing business enterprises in other related businesses
opportunistically. To finance future acquisitions, we expect to use a
combination of cash flow generated by our operating activities and, in some
instances, our common stock. As one of the few companies in our industry with
publicly listed common stock, we believe that we will have a significant
advantage over most of our competitors in financing such consolidating
acquisitions.
To complete the digitalization of our entire movie and photograph
library in order to prepare our library for distribution in new electronic
media. We have developed an extensive library of motion pictures and other
pictorial content. Until recently, this library was archived on a master print,
which would allow duplication in traditional media. New forms of electronic
distribution provide us with an opportunity to use this content by distributing
it on new forms of media, such as DVD, Internet and broadband. To facilitate
electronic distribution of our products, we have converted our entire archive of
print images into a digital format. We are currently digitizing our motion
picture archive as well, and have now stored over 50% of our existing motion
pictures in digital form.
Continue to increase and strengthen brand awareness. We have developed
strong brand awareness within each of our magazines and videos' targeted
markets. We own the worldwide rights to all of our content. We seek to
strengthen awareness of our brand name by consistently featuring the Private
label prominently in our product packaging, cross-promoting our own products,
selectively sponsoring sports and distributing under the Private label
complementary or ancillary non-media products that are consistent with an adult
entertainment lifestyle.
OUR PRINCIPAL PRODUCTS AND MARKETS
Magazine Publications
We are the publisher of Private, an international X-rated magazine.
Private was founded 35 years ago, and was the first full color, hardcore sex
publication in the world. Today, we produce four X-rated magazines which are
released bi-monthly: Private, Pirate, Triple X and Private Sex. In addition,
special editions are released monthly and a book, The Best of Private, is
released annually. Our newest magazine, Private Life, which is produced by our
- 6 -
licensees, is the first softcore magazine we have distributed. We distribute
these magazines through newsstands and other retail outlets.
Movie Productions
Since 1992, we have acquired and distributed adult motion picture
entertainment. These productions generally feature men and women in a variety of
erotic and sexual situations, generally in both hardcore and softcore versions.
We distribute these movies primarily on videocassettes, DVDs, through cable,
satellite and hotel television programming and over the Internet. We maintain
the ownership and copyrights of every movie we finance and produce.
We expect to produce approximately 100 X-rated and 36 R-rated movies in
2002, with distribution through a worldwide network that covers approximately
60,000 points of sale, including primarily videoshops and adult book stores. We
believe we have the potential to reach more than 155,000 points of sale. Our
first two monthly video labels were Private Film and Private Video Magazine.
Both labels received critical acclaim in leading international magazines as well
as numerous industry awards from industry associations and major adult
entertainment movie festivals, including Adult Video News, Impulse d'Oro and
Golden X. They were followed by the introduction of our monthly labels Triple X,
Private Stories and Private Gold. In May 1997, we introduced Gaia, a bi-monthly
label. In 1998, we introduced a bi-monthly new label, Private Black Label. In
1999, we introduced four new monthly labels Pirate Video Deluxe, Private XXX,
The Matador Series and Peep Show Special. In 2000, in addition to several
compilations, we introduced the label Private & Penthouse Video in conjunction
with Penthouse.
As of December 31, 2001, our movie library contained 462 movie titles.
By the end of 2002 we expect the total to increase to approximately 600 titles.
All titles are available on videocassette and nearly 50% are available on DVD.
These products are sold by distributors, primarily to retail stores and
wholesalers worldwide. Several of our original motion picture programs have also
been re-edited and licensed to cable, satellite and hotel television operators.
Internet
Our Internet team has combined the quality of our extensive media
library with the newest technology to create what we believe to be one of the
best adult websites, www.private.com. We believe that the rapid growth of the
e-commerce market and increased access to the Internet by consumers has created
an excellent opportunity for us to utilize our proprietary assets through
marketing and distribution on the Internet. Private.com offers its more than
100,000 members access to high quality adult content, including over 200,000
pages of magazine pictures, photosets, stories, an interactive search categories
gallery and access to video clips from more than 400 Private Media Group movies.
Private.com members also get access to live, webcam, and contact/personals
content. Private.com acquires customers primarily through advertising in DVDs,
videos, magazines and broadcast programming with minimal incremental cost. It
also acquires new customers by establishing partnerships with leading portals
including Excite, Lycos, T-online, Prisacom and other e-commerce websites.
Due to Private.com's recognized brand name among adult site purveyors,
we have many customers who have the confidence to make credit card payments to
us. Current subscriptions prices are $29.95 for a month's subscription and
$149.95 for an annual subscription. Consumers wishing to avoid credit card
payments or not having a credit card can access Private.com content through
so-called dialer access by dialing into a premium rate number and paying a per
minute fee that varies depending on the country. Private Media Group also
cross-sells its retail products through the Private.com shop. For example,
Private.com is able to offer a consumer who views content on its website an
opportunity to purchase that content, in a magazine, on DVD or video or in its
on-line store. The Private.com website is currently generating traffic of
approximately 2.5 million visits per month and more than 60 million pages are
viewed per month. We currently maintain a staff of 36 full-time Internet
employees.
- 7 -
We have also developed a website called privatespeed.com, offering
broadband customers access to Private Media Group's complete collection of
movies and video content through video-on-demand. Privatespeed has a two pronged
strategy for acquiring customers for its prepaid service: by partnering with
broadband Internet service providers, or ISP's who host our content and
distribute products to their installed customer bases and by targeting broadband
customers directly, who view the content over the Internet. As of December 31,
2001, privatespeed.com has sold over 640,000 minutes directly to consumers since
it launched in May 2001 with minimal marketing activity. We are currently
negotiating agreements with leading broadband ISP's. We believe that with
privatespeed.com we are well positioned among adult entertainment companies to
take advantage of the transition to broadband content distribution.
In addition, we are licensing the right to use our trademarks and media
library on the Internet to third parties with independent websites. This
licensing activity generates significant royalty income. In addition, we market
our products on the Internet through distributor sites and shopping sites.
OTHER MARKETS
In April 1996, we launched our Private Collection International, Inc.
line of adult pleasure products. We also license the Private name in connection
with various lines of clothes, nutritional supplements, energy soft drinks,
personal skin care products and on-line gaming. Channels of distribution for
licensed products include conventional distribution channels, e-commerce and
television home shopping.
HISTORY
The parent company, Private Media Group, Inc., was originally
incorporated in 1980 as a Utah corporation under the name Glacier Investment
Company, Inc. for the purpose of acquiring or merging with an established
company. In 1991, we changed our domicile to the State of Nevada. The parent
company had no material business activity prior to its acquisition of Milcap
Media Limited and Cine Craft Limited in June 1998.
On December 19, 1997 Private Media Group, Inc. entered into acquisition
agreements with Milcap Media Limited and Cine Craft Limited to acquire all of
their outstanding capital stock in exchange for 22,500,000 shares of Common
Stock, 7,000,000 shares of the $4.00 Series A Preferred Stock, and 2,625,000
common stock purchase warrants. Private Media Group, Inc. completed these
acquisitions on June 12, 1998. In connection with these acquisitions, in
December 1997 the parent company changed its corporate name to Private Media
Group, Inc. and declared a one for five reverse split of its Common Stock.
On January 28, 2000, we acquired all of the outstanding shares of
Extasy Video B.V. for total consideration of SEK 27.3 million. The consideration
consisted of 208,464 shares of common stock and warrants to purchase 208,464
shares of common stock. The warrants are exercisable during the period January
28, 2001 to January 28, 2004 at an exercise price of $9.63.
In May 2000, we authorized a three-for-one stock dividend on our common
stock, which was distributed to holders of record of common stock on May 30,
2000.
As of January 1, 2001, we acquired Coldfair Holdings Ltd., a company
incorporated and organized under the laws of the Republic of Cyprus, for a total
consideration of SEK 13.4 million payable in 248,889 shares of common stock.
Coldfair Holdings is a company engaged in the marketing and sale of adult
entertainment products and services.
Effective April 1, 2001, we acquired the inventory and certain
contracts of our U.S. distributor, Private USA, in exchange for SEK 9.1 million
and the assumption of Private USA's obligations under some contracts.
On April 8, 2001, Peach Entertainment Distribution AB (Sweden), a
subsidiary of Private Media Group, Inc., sold its interest in Private Circle,
Inc., a company engaged in the design, production and marketing of trendy
- 8 -
casual apparel, for an adjusted consideration of SEK 27.1 million as of May
2001.
INDUSTRY OVERVIEW
The adult entertainment industry has evolved rapidly in recent years.
In spite of often intense political campaigning, there has been a general trend
towards wider acceptance of adult entertainment content among the general public
and mainstream media channels. New technologies have lowered costs and changed
the way in which adult content is produced, distributed and viewed. Lower costs,
in particular, have lowered barriers to entry and increased competition in the
adult entertainment industry. The trend toward wider acceptance of
sexually-explicit material and ongoing technological developments has created a
large and growing global market for adult content.
Historically, the adult entertainment industry has attracted a
considerable level of government and regulatory attention primarily due to
obscenity, which has led to limitations on either the explicitness of content or
the availability. Traditionally, to view adult material, consumers were required
to purchase movies in a public environment or to go to an adult movie theatre or
peepshow.
Through a process of evolution rather than revolution the adult
entertainment industry has become more acceptable over time, with a relaxation
of the regulations and guidelines governing the industry. For example, in the
United Kingdom, one of Europe's more restrictive countries with respect to adult
entertainment, there has been a gradual relaxation of what is suitable for
public viewing. The British Board of Film Classification, BBFC, has introduced
the `R18' category, allowing distribution of hardcore adult videos through
licensed sex shops for the first time. The approval from the BBFC, and
subsequent theatrical release of movies such as The Idiots and Intimacy have
also broadened what is regarded as acceptable adult content.
New technologies have helped to legitimize the industry and increase
the size of the market. During the 1980s, the introduction of adult movies on
videocassette and through broadcasting on cable and satellite television
increased acceptance of adult media content by confining it to the privacy of
the consumer's home. More recently, the Internet has become a primary
distribution platform for both suppliers and consumers of adult media content
providing low-cost delivery and increased privacy. Although currently
unexploited, third generation mobile and handheld devices are likely to increase
the market even further in the future, making adult media content viewing
mobile.
The production and distribution of adult media content is very
competitive. Hundreds of companies are now producing and distributing movies to
wholesalers and retailers, as well as directly to consumers. The low cost of
high quality video cameras and equipment has significantly lowered the barrier
to entry for production of adult media content. According to Adult Video News,
approximately 10,000 new adult video titles were released in the United States
in 1999, up from 8,950 in 1998 and 1,275 in 1990. The bulk of this production is
represented by low quality, amateur productions, made for only a few thousand
dollars, as opposed to the larger, professionally produced movies with high
production values. Around 20 major producers, such as Private Media Group,
Vivid, Video Company of America and Metro, release most high budget adult videos
and DVDs. See "Business-Competition." In addition, because it costs as little as
$ 5,000 to establish an Internet presence, there is significant competition
among distributors of adult media content over the Internet. The proliferation
of websites distributing adult media content has itself fueled a greater and
ongoing demand for the creation and licensing of new adult media content.
We believe that the global adult entertainment market exceeds $ 56
billion annually. This covers memberships and subscriptions, escort services,
magazines, sex clubs, telephone sex lines, cable and satellite pay-per-view
programming, adult videos and toys and other related products and services. In
1998, Forrester Research estimated the U.S. adult entertainment market at $ 10
billion annually. This compares to total U.S. cinema box office receipts for
mainstream motion pictures of $ 7.7 billion in 2000 ($ 6.95 billion in 1998),
indicating the size and importance of the adult market within the entertainment
industry.
- 9 -
VIDEO AND DVD SALES & RENTAL
Bringing adult movies into the privacy of the home through the
introduction of videocassettes along with cable and satellite services all but
eliminated the adult theatre business. The introduction of the DVD and its
rapid acceptance by the public is gradually shifting the balance of home
viewing from videos to DVDs. DVDs offer better picture and sound quality than
videos, worldwide compatibility and other add-ons. The DVD format also benefits
suppliers and retailers. Several languages can be combined onto one DVD, so
only the DVD cover needs to be changed for different territories. Also, back
catalogue sales should initially increase as consumers look to replace their
videocassette library with the new format.
Although DVDs will not replace videocassettes completely in the near
term because of the ability of users to record on videocassettes as well as
their current high level of market penetration, currently comprising
approximately 93 million households in the United States, rentals and sales of
DVDs are likely to increase significantly as more DVD players are sold. IDC
Research anticipates that the number of household with DVD players in the
United States will increase to 43.6 million in 2002 from 15.0 million in 2000.
Similar growth is expected in Western Europe, with the number of households
with DVD players increasing to 13.5 million in 2002 from 4.7 million in 2000,
according to the International Recording Media Association.
In the U.S. market, total rental and retail spending on video and DVD
titles in 2000 was over $ 19 billion, a 10% increase over 1999, according to
the Video Software Dealers Association. In 2000, total sales and rentals of
adult videos in the United States were approximately $ 4.0 billion according to
Adult Video News estimates, including sales through general interest retailers
and dedicated adult stores. In 2001, PR Week reported that the Free Speech
Coalition estimated that 20% of all U.S. households with either cable or
satellite television or a VCR watch adult movies.
The provision of in-room entertainment services by major hotel chains
throughout the world also serves as a distribution channel for adult media
content. In addition to a selection of mainstream movies, hotel guests often
will have a choice of softcore, and frequently hardcore, adult videos available
on a pay-per-view basis. In the United States, these services are provided by
companies such as On Command and Lodgenet, which supply approximately 950,000
and 800,000 hotel rooms, respectively. Estimates by analysts cited to by the
Los Angeles Times in 2001 suggest that adult movies generate approximately half
of total hotel pay-per-view revenue in the United States, approximately $ 250
million annually. Outside of the United States, excluding more restrictive
countries such as the United Kingdom, hotel guests also have access to hardcore
material on a pay-per-view basis.
BROADCASTING
Cable and satellite television have also brought adult media content
into the privacy of the home. Technological developments, in particular the
evolution of digital broadcasting, should not only increase the number of
channels that can be delivered directly to the home, but should also lead to
video on demand. The development of these services should benefit the adult
entertainment industry by providing a greater number of special interest
channels providing pay-per-view services. This should also increase the need
for new adult media content.
In the United States, in addition to softcore channels such as Playboy
TV, AdulTVision, Spice Channel and The Adam & Eve Channel, there are several
hardcore video channels available, including Eurotica, Exotica, Exxxtasy, True
Blue, X!, Xxxcite and XXXplore, that offer uncensored hardcore material. In
2001, the Asian Wall Street Journal stated that, according to Kagan World
Media, of a total pay-per-view revenue for satellite and cable television
operators in the United States of $ 1.73 billion, around 27%, or $ 465.0
million, can be attributed to adult movies.
In 1999, Playboy and Spice Entertainment Companies, Inc. entered into
an agreement resulting in the
- 10 -
combination of the two companies. Playboy also acquired three television
networks - the Hot Network, the Hot Zone and Vivid TV - in July 2001 which has
altered Playboy's focus from softcore to hardcore programming.
At the end of 2000, according to Screen Digest, there were over 64
million subscribers to cable and satellite television in Western Europe.
According to Forrester Research, in the United States there were approximately
83 million subscribers to satellite and cable television services at the end of
2000. The number of cable and satellite television subscribers is expected to
continue to increase, as well as gradually shift from analog to digital
services.
INTERNET
The adult entertainment industry was among the first to commercially
exploit the Internet as a distribution channel, and among the few industries
believed to generate a profit on the Internet. The Internet offers relative
privacy for users, a seemingly endless selection of adult media content and can
provide immediate delivery. Datamonitor research estimated that adult content
accounted for 69% of paid content on the Internet in 1998.
Pay sites contain most of the adult media content on the Internet, but
free sites are also common and are primarily supported by advertising from pay
sites. Free sites get a few cents for each viewer who clicks on an advertising
banner. The banner then transports these viewers to a site that tries to entice
the user into paying for content using their credit cards. In 1999, Datamonitor
estimated that there were well over 100,000 sexually-oriented sites, of which
only about 14,000 generate revenues. Of the revenue-generating sites, only a
handful of these account for the majority of overall revenues on the Internet
for adult media content.
According to searchterms.com, `sex' is the third largest category
searched for on the Internet after `autos' and `travel', but above `shopping',
`games' and `MP3'. Of the 1.6 billion web pages indicated as available by the
Google search engine, searching for `sex' results in 15.9 million pages and
`porn' results in 3.3 million. In June 2001, Internet monitoring company
NetValue estimated the following numbers of Internet users were visiting adult
sites at least once per month: 5.3 million in Germany; 3.8 million in the
United Kingdom; 2.7 million in France; 2.4 million in Italy and 1.5 million in
Spain. In the United States, PR Week reported that Nielsen/Net and Media
Metrix estimated that approximately 21 million Americans visit an adult content
site at least once per month.
A number of well-established Internet businesses have recognized the
revenue potential of adult media content and now provide those
services.Freenet.com, Germany's second largest internet service provider has
launched Fundorado.de offering hardcore movies, photographs and sex chat groups
on a monthly subscription basis. In the United Kingdom, online retailer
Lastminute.com has recently introduced a range of adult games and toys to its
site. However, this development has also been subject to criticism, leading to
withdrawals such as Yahoo!'s reversal of its decision to sell adult videos on
its sites after receiving numerous complaints from consumers.
The use of the Internet for viewing adult media content is expected to
increase significantly as home Internet access increases and broadband services
become more widely available. IDC estimates that in 2005 the number of home
Internet users will reach 194.1 million in the United States as compared to
100.8 million in 2000 and 196.4 million in Western Europe as compared to 80.3
million in 2000. Forrester Research estimates broadband services will reach
46.7 million households in the United States by 2005 as compared to 5.0 million
in 2000 and 28.7 million in Western Europe as compared to 400,000 in 2000.
The increased availability of adult media content on the Internet has
attracted considerable attention. Concerns have arisen with respect to child
protection and the distribution of illegal material. In response to the issue
of child protection, a number of software packages have become available that
control the content that can be accessed from a personal computer. Products
such as Surfcontrol, NetNanny, Websense and others can be employed to filter
sites for inappropriate material, blocking access for unauthorized users.
- 11 -
MAGAZINE PUBLICATIONS
Our publishing operations include the publication of the adult
magazines identified in the table below, special editions consisting of
previously published material and occasional newsstand specials, calendars and
paperback books. All of these magazines, together with local editions, are
printed under various trade names and are distributed in over 35 countries. We
publish several customized editions of our four principal magazines. Each
edition contains the same editorial material but provides locally targeted
content reflecting local governmental regulation regarding explicit adult
publications. Most of our magazines feature pictures of men and women engaged
in erotic and sexually explicit situations. We distribute approximately 300,000
copies of our print publications per month at an average retail price of
approximately (Euro) 11.50. Our most popular publications are Private, Pirate,
Private Sex and Triple X.
MAGAZINE LIBRARY As of December 31,
- -------------------------------------------- --------------------------------
2001 2000
- -------------------------------------------- --------------- ---------------
Title No of Issues No of Issues
--------------- ---------------
Private................................... 168 162
Pirate.................................... 70 64
Triple-X.................................. 44 38
Private Sex............................... 35 29
Special Editions.......................... 7 6
Best of Private (Book).................... 13 12
--------------- ---------------
Total..................................... 337 311
=============== ===============
Quantities of Magazines Produced
(Printed, not sold)
---------------------------------
Title 2001 2000
- -------------------------------------------- --------------- ----------------
Private................................... 642,200 697,500
Pirate.................................... 471,500 515,100
Triple-X.................................. 457,200 518,050
Private Sex............................... 346,500 391,840
Special Editions.......................... 75,150 54,000
Best of Private (Book).................... 58,200 109,550
--------------- ----------------
Total..................................... 2,050,750 2,266,990
=============== ================
Our publications offer a variety of features and have gained a loyal
customer base. We believe we have earned a reputation for excellence by
providing a high standard of quality to the adult entertainment industry, while
we maintain circulation leadership as the leading hardcore magazine publisher.
All of our publications have long been known for their graphic excellence and
features, and publish the work of top artists and photographers in the field.
They are also renowned for their pictorials of beautiful people. Our magazines
command some of the highest prices in the industry.
All of our publications are printed by independent third parties. We
have a longstanding relationship with several printers in Spain, and a printer
in the United Kingdom. Our U.K. printer also prints adult magazines that
compete with our products. Nonetheless, we believe that generally there is an
adequate supply of printing services available to us at competitive prices,
should the need for an alternative printer arise. All of our production and
printing activities are coordinated through our operating facility maintained
by our wholly owned subsidiary, Milcap Media Group.
CIRCULATION
Our magazines have historically generated most of their revenues from
firm sales distribution. However,
- 12 -
now distributors with rights to return represent approximately 50% of our
production. Single copy retail sales normally occur in adult book stores and
similar establishments. Newsstand retail sales are permitted in most European
countries, including France, Italy, Spain, Germany, Denmark, Sweden, Finland
the Benelux countries and Portugal.
Our magazines are distributed to newsstands and other public retail
outlets through a network of national distributors, who maintain a local
network of several wholesale distributors and licensors. We have entered into
national distribution agreements covering over 35 countries and generally deal
with a magazine distributor for local distribution of our publications. We ship
copies of each issue in bulk to our wholesalers, who distribute on to local
retailers.
Independent distributors who distribute our magazines do so under
individual distribution agreements. These agreements are normally subject to
automatic yearly extensions unless either party terminates the arrangement.
For the past few years, we have sought to expand the use of our
magazines' content and other assets across different media formats. Our primary
focus in recent years has been the re-editing and digitizing of every Private
magazine for use on our websites. This content was initially available on our
websites in May 1998, and we completed the digitization of our still photo
archive in 2000.
PRODUCTION, DISTRIBUTION AND FULFILLMENT
Four independent printers in Spain currently print most of our
magazines, books, brochures and video and DVD covers. Printing costs vary based
upon the price of component raw materials. The principal raw materials
necessary for publication of our magazines are coated and uncoated paper. Paper
prices are affected by a variety of factors, including demand, capacity, pulp
supply and by general economic conditions. Our printers have a number of paper
supply arrangements and we believe that those arrangements provide an adequate
supply of paper for our needs. In any event, we believe that alternative
sources are available at competitive prices. With respect to color separation,
pre-press and related services, we currently use our own scanning facilities
and have the support of two independent suppliers for color separations. We are
also using the latest technologies in this field, such as digital imposition
and computer-to-plate process technology, or CTP. CTP eliminates the need for
the production of film/color separations during the pre-printing process,
saving time and money while improving quality. In simple terms, CTP allows
printers to receive computer disks containing electronic files (both text and
graphics) and output those files directly to a plate. The result is a top
quality image which takes minutes instead of hours to produce. We are nearing
completion of our planned implementation of CTP process technology for printing.
We print and ship all of our proprietary magazines from Barcelona,
Spain with the exception of our U.K. licensee, who receives all our magazines
in digital format and prepares its own layout and color separations before
printing locally adapted softcore editions of all our magazine titles. We
determine the amount of printed publications bi-monthly with input from each of
our national distributors.
Most of our products are packaged and delivered directly by the
printer or supplier, while Milcap Media Group provides warehousing, customer
service and payment processing. Milcap Media Group employs a staff of 20
professionals to manage the production and to oversee the printing and
distribution of our magazines.
LICENSED PUBLISHING
In 1999, we signed a licensing agreement with K-OS Publications (UK)
Limited for the publication and distribution in Britain of two new softcore
titles bearing the Private trademark. Private Life magazine was first published
in the United Kingdom at the end of 1999, while Private Style magazine is set
to launch in 2002.
MOVIE PRODUCTIONS
- 13 -
In 1992, we began releasing movies under the Private label.
Our adult movies are in genres similar to our magazines and books
under the titles listed in the table below. Normally, we spend on average
between $ 25,000 and $ 125,000 per movie. This amount excludes the computation
of the post-production, master production, duplication and distribution costs.
Generally, Milcap Media Group creates and designs all artwork for promotional
items and packaging and contracts for printing services. Since 1997,
independent laboratories have duplicated all of our videocassettes for us.
Similarly, since 1999 all DVDs have been duplicated by independent laboratories
as well. A number of our titles, including Private Film, Private Video
Magazine, Triple X, Private Stories, Private Gold and The Matador Series are
released on a monthly basis while others are released on a bimonthly or less
frequent basis. As of December 31, 2001, our movie library contained 462 movie
titles. By the end of 2002, we expect the total to increase to approximately
600 titles. All titles are available on videocassette and close to 50% are
available on DVD. We sell approximately 75,000 videos and 80,000 DVDs per
month. We continue to expand our video operations in international markets and
presently market our video products in over 35 countries.
We finance all of our adult movies, and we contract with video and
movie producers on a flat fee basis. All producers generally assume production
costs and obligations, including among other things, the delivery of rights and
model releases. Historically, we have principally financed new movies with the
cash flow generated by previous productions. To date, we have not solicited any
external financing for any of our acquisitions other than the $ 4.0 million
Note entered into with Commerzbank AG in December 2001.
2001 2000
---------------- --------------
MOVIE LIBRARY No of Titles No of Titles
- --------------------------------------- ---------------- --------------
Private Video Magazine ................ 26 26
Private Film .......................... 28 28
Triple-X Video ........................ 32 32
Private Video Stories ................. 27 27
Private Gold .......................... 45 45
Gaia .................................. 6 6
Pirate Video .......................... 12 12
Triple-X Files ........................ 12 12
Casting-X ............................. 25 25
Best of Private ....................... 6 6
Private Black Label ................... 16 16
Pirate Video Deluxe ................... 12 12
Private XXX ........................... 12 12
Special Compilations .................. 22 22
Amanda's Diary ........................ 5 5
Peep Show Special ..................... 12 12
Horny Housewives ...................... 9 9
The Matador Series .................... 8 8
The Story ............................. 2 2
Private Movie ......................... 1 1
Private & Penthouse Video ............. 5 5
Private Super F****** ................. 7 7
Pirate Fetish Machine ................. 2 0
The Private Life of ................... 3 0
Private Reality Video ................. 3 0
Virtualia ............................. 5 0
Softcore Versions ..................... 70 46
---------------- --------------
Total ................................. 376 290
================ ==============
- 14 -
We have licensed many of our original programs to cable television
networks and adult pay-per-view television channels. These licenses generally
grant the television channel owner a specific right of transmission and we
retain the intellectual property rights of every production. We edit many of
our new feature video and movie releases into several versions depending on the
media through which they are to be distributed. In general, versions edited for
cable, satellite and hotel television programming are less sexually explicit
than the versions edited for home video distribution.
DISTRIBUTION
We distribute our productions worldwide via masters, videocassettes
and DVD's that are sold or rented in video stores, sex shops, newsstands and
other retail outlets, and where permitted, through direct mail. Our website has
contributed to increasing video and DVD sales, and we expect this new medium to
become a significant distribution channel in the future.
We have entered into distribution agreements in over 35 countries.
Under these distribution agreements, our subsidiary Peach Entertainment
Distribution or Milcap Media Group, agrees to provide a specific minimum number
of new titles each month during the term of the agreement, and a licensee
normally serves as the exclusive distributor throughout its own country or
language territory. Under the various distribution agreements, licensees are
normally required to purchase a minimum number of units for each monthly period
during the term of the agreement.
In countries such as Germany, we have expanded our relationships with
our national distributor by entering into exclusive multi-year, multi-product
output agreements. In countries such as the United States, the Benelux
countries, France and Spain, we have established local subsidiaries for the
purpose of owning or controlling local distribution. In the near future, we
intend to renegotiate some of our national distributorship agreements in order
to vertically integrate Private Media Group into the chain of distribution. In
general, we believe that national distribution agreements enable us to have an
ongoing branded presence in international markets and to generate higher and
more consistent revenues, than we could achieve selling directly to retailers.
In October 2001 we entered into an agreement with Quadriga Worldwide,
a leading European hotel entertaiment and service provider, to make a wide
selection of our movies available to guests in hotels serviced by Quadriga.
Quadriga presently provides 6,350 hotels in 30 countries with interactive
entertainment and information services, covering 321,000 hotel rooms worldwide,
with an estimated potential annual audience of 100 million hotel guests. Key
customers of Quadriga include leading hotel chains such as Best Western
International, Scandic Hotels, Choice Hotels, Starwood Hotels and Resorts, Six
Continents Hotels, Accor Hotels, Carlson Hospitality Worldwide, Marriott
Hotels, Thistle Hotels and Societe du Louvre.
VIDEO DUPLICATION/PRODUCTION TECHNIQUES
Masters are customized and duplicated by our subsidiary Peach
Entertainment Distribution and from there they are sent to different
distributors and VHS duplication centers. Some distributors receive a master
directly and do their own duplication.
All artwork to print the video covers is created at Milcap Media
Group. Most countries receive their own pre-printed covers from Spain and some
countries print their own covers from CD-Roms when delivered.
THE DVD MARKET
Distribution of DVDs represents one of our fastest growing markets. We
believe we set a high standard for DVDs in the adult entertainment industry,
with each DVD released by us possessing five language options as well
- 15 -
as four other subtitled languages. We believe that our multi-language DVD
format provides a significant competitive advantage for us because it attracts
consumers worldwide and expands our international marketing and sales
potential. This global format allows us to reduce our overall unit production
costs and increase profit margins. Currently, the majority of DVDs released by
our competitors in the United States and worldwide are produced in only one
language. As a result, they have to either license titles country-by-country or
manufacture each title in separate languages, thus loosing out on economies of
scale. As the manufacture of each DVD master disc, prior to duplication, costs
approximately $ 10,000, this further drives down our competitors' profit
margins.
Currently, mainstream movie titles are released on DVD in six Regional
Codes or Zones. This is required primarily because producers often do not
control the worldwide rights to their titles. Our DVDs are playable in any
region, in every country in the world, because we own and control the global
rights to everything we have produced.
Our DVDs are also "Internet Activated," which means that when a
consumer plays the DVD in a personal computer, that person also gets a direct
link to our websites, where they can view our content by purchasing a
subscription or visit our extensive on-line shopping area. We also sometimes
add `extras' to our DVDs, including alternative endings to movies, interviews
with the stars, biographical data on the actors, their roles in other in-house
productions and publications, and multiple-angle views.
BROADCASTING
In 2000, we signed an exclusive joint venture agreement with
International Film Productions and Distributions, Ltd., IFPD, to create two new
adult television channels to be broadcast worldwide. IFPD is a European-based
television broadcasting company associated with major content providers that
specializes in the distribution of cable and satellite television channels.
Under the terms of our joint venture agreement, IFPD has agreed to
ensure the promotion and broadcasting of our new adult channels, Private Gold
and Private Blue, to a worldwide audience and we have agreed to provide all
adult media content and trademarks. The Private Gold channel will present
hardcore material, while the Private Blue channel will broadcast softcore
material. Under this agreement, we will receive 65% of the gross profits
generated from the broadcast of, and advertising on, these channels. We also
have an option to acquire up to 65% of the equity in IFPD at face value. In
2000, we also started broadcasting our Private Blue channel in the United
Kingdom under an exclusive joint venture agreement with Zone Vision
Enterprises, a UK-based television company, and IFPD. These channels operate on
digital and analog platforms throughout continental Europe. We receive 35% of
the net profit generated from those broadcasting and advertising revenues.
Private Blue is available through the analog and digital satellite platforms of
BSkyB and the Telewest cable network in the United Kingdom. In November 2001 we
entered into a distribution agreement with NTL Network to make Private Blue
available to over one million NTL digital cable subscribers in the United
Kingdom on a pay-per-night basis. We also launched in Turkey on the DigiTurk
platform, and in Hungary and Slovakia on the UPC networks, and in the
Netherlands with MediaKabel. Currently available to over 6.6 million
addressable subscribers in the UK alone, Private Blue has also secured an
international satellite feed on the SIRIUS 2 satellite. This means that our
Private Blue signal is available for further expansion to subscribers in all
territories of Europe from 23.00 to 05.00 Central European time every day of
the year.
Our Private Gold television channel, broadcasting under Dutch license,
successfully launched in Hungary on the HCA Cable Association platform and in
Hungary, Slovakia and the Czech Republic on cable systems and the UPC Direct
satellite network in 2000. Private Gold also secured an international satellite
feed on the AMOS 1 satellite. This will allow us to expand to subscribers in
all territories in Europe from 24.00 to 04.00 Central European time, every day
of the year. A second satellite feed, on the ASTRA satellite with Cryptoworks
encryption, also became available in 2000. ASTRA is one of the leading
satellite systems for direct-to-home transmission of television, radio and
multimedia services in Europe. ASTRA currently has a fleet of nine satellites
and transmits to 22 European countries.
- 16 -
In 2001, we entered into an agreement with Canal Digital AS which
provides for the distribution of the Private Gold television channel through
Canal Digital in Sweden, Denmark and Finland as part of an exclusive joint
venture agreement with IFPD. Canal Digital is jointly owned by the French
company Canal+ and the Norwegian company Telenor. Canal Digital operates in the
Nordic countries and is one of the leading suppliers of digital programs and
services in the Nordic region. Canal Digital has more than 1.1 million card
customers and over 700,000 subscribers to its services in the Nordic region.
In 2001, the Private Gold and Private Blue television channels were
contracted for distribution throughout Latin America by Pramer S.C.A. Pramer is
the largest company in Latin America dedicated to producing, distributing and
commercializing content for cable and satellite television. Pramer will be
responsible for the satellite distribution, advertising and commercialization
of the Private Blue and Private Gold channels throughout Latin America. Both
channel signals are transmitted on the NSS 806 satellite that covers the entire
South American continent making the channels available to all of Latin
America's 15 million satellite and cable subscribers.
In June 2001, we signed an agreement with Wizja TV to broadcast
Private Gold in Poland. Wizja TV is one of the largest Direct to Home platforms
in Poland with approximately 400,000 subscribers.
We believe that currently our Private Gold and Private Blue channels
are available to approximately 28 million potential viewers worldwide.
In addition to the expansion of Private Gold and Private Blue, we
signed other agreements concerning broadcasting of our content in 2000,
including our agreement with media[netCom] AG.
In August, 2000 we entered into a two-year motion picture licensing
agreement with Playboy, which calls for us to supply Playboy with motion
picture content for Playboy's television networks throughout the Americas.
Under the agreement, Playboy will receive the exclusive rights to broadcast our
content on their networks over the term of the agreement for a fixed payment
amount.
We also entered into agreements with Canal+ in 2000 to supply adult
movie content for Canal+'s television networks throughout Europe. Canal+
receives the exclusive rights to broadcast 75 titles from our library on their
networks. The territories included are France, French-speaking Belgium, the
Netherlands, Luxembourg, Scandinavia, Spain and Italy. Canal+ is one of
Europe's largest Pay-TV operators with approximately 15.5 million subscriptions
to its different offerings and approximately 5.8 million digital subscribers as
of December 31, 2001.
INTERNET SERVICES
Our Internet team has combined our extensive media library with the
newest technology to create what we believe to be one of the best adult
websites, www.private.com. We believe that the rapid growth of the e-commerce
market and increased access to the Internet by consumers has created an
opportunity for us to use our proprietary content assets through distribution
over the Internet. During the first nine months of 2001, Private.com offered
its more than 100,000 paying members access to high quality adult media
content, including over 200,000 pages of magazine pictures, photosets, stories,
interactive search galleries and access to video clips from more than 400
Private Media Group movies. Private.com members also get access to live,
webcam, and contact/personals content. Private.com acquires customers primarily
through advertising in DVDs, videos, magazines and broadcast programming with
minimal incremental cost. It also acquires new customers by establishing
partnerships with leading portals, including Excite, Lycos, T-online, Prisacom
and other leading e-commerce websites. In November 2001 we entered into a
non-exclusive online cooperation agreement with Lycos Spain, which calls for
the establishment of an adult portal with links to our www.Private.com website.
Initially the adult portal will be included on Lycos' Spanish site,
www.lycos.es, and is expected to be expanded to other European sites.
Due to Private.com's recognized brand name among adult site purveyors,
it has many customers who have
- 17 -
the confidence to make credit card payments. Current subscriptions prices are
$ 29.95 for a month's subscription and $ 149.95 for an annual subscription.
Consumers wishing to avoid credit card payments or not having a credit card can
access Private.com content through so-called dialer access by dialing into a
premium rate number and paying a per minute fee that varies depending on the
country. Private Media Group cross-sells its retail products such as videos and
DVDs through the Private.com shop. For example, Private.com is able to offer a
consumer who views content on the website an opportunity to purchase that
content, in a magazine, on DVD or video, in our on-line store. The Private.com
website is currently generating traffic of approximately 2.5 million visits per
month and more than 60 million pages views served per month. In 2000,
Private.com won the Award du X at the Erotic Trade Fair in Brussels, Belgium.
We currently maintain a staff of 40 full-time Internet employees with more than
10 focusing on technology and the concentrating on website production, sales
and marketing and customer support.
We have also developed a website called Privatespeed.com, offering
broadband customers access to our complete collection of movies and video
content through video-on-demand. Privatespeed has a two pronged strategy for
acquiring customers to its prepaid service: by partnering with broadband ISP's
who host its content and distribute products to their installed customer bases
and by targeting broadband customers directly, who view the content over the
Internet. Privatespeed.com has sold over 640,000 minutes directly to consumers
since it launched in May 2001. We are currently negotiating agreements with
leading broadband ISP's. We believe that with Privatespeed.com we are well
positioned among adult entertainment companies to take advantage of the
transition to broadband content distribution.
We market all of our products directly by e-mail, and had an e-mail
list on December 31, 2001 of approximately 800,000 addresses. We also have
direct links from our DVD and CD-Rom products to our Internet sites, where we
can update such products quickly. We utilize a secure Web Pay application
developed by Verisign which allows on-line processing of credit card payment
transactions. We have in place a well-known protection program, Netnanny,
Cyberpatrol, for minors which can be controlled by adults to limit access to
our websites.
LICENSEES
We license the right to use our trademarks and our library of
photographs and movies to third parties.
In December 1997, Milcap Media Limited entered into an Internet
license agreement with Cyber Entertainment Network, which is in the business of
developing and operating various adult websites. Under this agreement, we
granted Cyber Entertainment use of the website Privategold.com. We provide this
website with adult content and receive a percentage of the gross revenues from
fees collected through the sale of memberships to the website. We received more
than $ 160,000 per month in the year 2000 under this arrangement, an increase
of 100% over 1999. We understand that Privategold.com received, as of January
2001, 350,000 visits per day.
Our local German distributor VPS-Film Entertainment entered into a new
agreement for the distribution of video-on-demand from our extensive video
library on broadband Internet connections via the media[netCom] network in
2000. Media[netCom]'s customer distributes to local networks for further
distribution to consumers. The 30-month agreement calls for our distributor to
provide content for the entertainment service and for media[netCom] to market
the service to its customer base of local networks.
Our reseller program implemented through our websites,
www.privatecash.com and www.prvtshops.com, provides other websites with
promotional material designed to sell our products. The reseller program aims
to attract adult industry and non-adult industry website owners and potential
website owners to sell our products by means of a 25% commission program. We
then fulfill orders through our network of distributors.
TRADEMARK LICENSING
THE PRIVATE COLLECTION
- 18 -
Together with several licensees, we have developed a program to market
and distribute high quality branded merchandise over our websites and the
websites of those licensees. Our licensed product lines include clothing,
novelties, accessories, fragrances, leather goods, eyewear, nutritional
supplements, aphrodisiacs and condoms. These products have been marketed
principally through mail-order and retail outlets, including department and
specialty stores.
On November 30, 1995, Milcap Media Limited entered into a license
agreement with Private Collection and granted Private Collection worldwide
rights to own, operate, distribute, subcontract, market, advertise and promote
merchandise including, rubber goods, vibrating products, pumps, electric items,
lotions, lubricants, potions, aphrodisiacs, realistic rubber and latex
products, condoms, dolls, jelly products, massagers, playing cards and other
items that fall into these product groups, except the rights to greeting and
trading cards, leather and other apparels and lingerie which were licensed on a
non-exclusive basis.
In 1999, the ownership of Private Collection was transferred to Doc
Johnson Enterprises, a worldwide leader in the adult manufacturing and
distribution business with more than 20 years of experience and a reputation
for creative, innovative novelty products, and we renegotiated our 1995
agreement. Under the new five-year agreement, Doc Johnson Enterprises has the
exclusive worldwide right to manufacture, distribute, sub-contract, market,
advertise and promote a range of adult novelty products under the brand name
The Private Collection. We, in turn, are entitled to receive royalty income on
a quarterly basis, with a guaranteed minimum payment. We also have a right to
purchase at a special rate an unlimited amount of products manufactured under
the agreement for our own distribution through the Internet, television home
shopping and other similar media.
Under the terms of the agreement, Doc Johnson Enterprises has agreed
to maintain Private's high standards, to market The Private Collection with a
pricing policy similar to that of comparable merchandise under the Doc Johnson
brand name and to market the Private Collection in a manner similar to that
used by Doc Johnson for its own brands. We have agreed to promote The Private
Collection through our own products and services.
NUTRITIONAL SUPPLEMENTS, DRINKS AND OTHER SIMILAR PRODUCTS
In October 1997, we entered into a licensing agreement with RH-Patent
& Original AB to expand the market for nutritional supplements such as Private
Passion, Private Kick, Cold Relief, Metabolize 2000, Sleep Eeze, Maxi Charge,
and personal care products such as Brazilian Bronze, Waistline Management,
Cellulite Regulator Gel and Tight Factor.
RH-Patent & Original markets existing government approved products
such as guarana-based energy drinks and aphrodisiacs, under labels such as
Private, Private Passion and Private Kick, and distributes such products
through its existing distribution network and in new markets. These products
are also promoted for mail order and on the Internet.
In 1999, we signed an exclusive agreement with K-OS Distribution (UK)
Limited for the distribution in Britain and Ireland of its Private Dynamite
energy drink. Under the five-year agreement, K-OS can engage sub-distributors,
licensees and selling agents within the specified territory to distribute,
promote and sell the product. Private Dynamite is a premium-priced energy drink
that can be consumed by itself or used as a mixer.
PROPRIETARY RIGHTS
GENERAL
We believe that our branded magazine titles and logos are valuable
assets and are vital to the success and future growth of our businesses. We
have filed trademark registration applications with respect to most of our
trade names and logos. We believe that the name recognition and image that we
have developed in each of our markets significantly enhance customer response
to our sales promotions. We intend to aggressively defend our trademarks
- 19 -
throughout the world, and we constantly monitor the marketplace for counterfeit
products. We initiate legal proceedings from time to time to prevent
unauthorized use of our trademarks.
PIRACY PROBLEMS
According to figures from the Motion Picture Association of America,
annual losses from video piracy are an estimated $ 250 million a year in the
United States alone, and close to $ 3.0 billion a year worldwide. Adult Video
News estimated that approximately 20% of the U.S. video market (both rental and
sales in 2000) was attributable to adult videos.
Piracy involving adult entertainment products and services is most
prevalent in markets where pornography is illegal and in developing countries,
including Eastern European countries, such as Russia, Poland and Romania. We
believe that piracy is so prevalent in many of these countries that we cannot
distribute our products there, as piracy undercuts our price structure and
eliminates profit margins. It is very difficult to enforce our proprietary
rights in these markets.
Another piracy problem concerns the Internet. We are currently unable
to confirm that all mail order sites selling Private products actually sell our
original products and not pirated copies. The problem stems from distribution
procedures, which in the case of Internet, is straight from the Internet
provider's order page to the consumer. Also, video streaming over the Internet
renders it difficult for us to control the origin of what is shown.
Our legal counsel handles most piracy problems and attempts to resolve
these matters or litigate them on a case-by-case basis.
COMPETITION
GENERAL CONSIDERATIONS
Our products compete with other products and services that utilize
leisure time or disposable income of adult consumers. The businesses in which we
compete are highly competitive and service-oriented. We have few long-term or
exclusive service agreements with our customers. Business generation is based
primarily on customer satisfaction with key factors in a purchase decision,
including reliability, timeliness, quality and price. We believe that our
extensive and longstanding international operations, our brand name, image and
reputation, as well as the quality of our content and our distributors, provide
a significant competitive advantage over many of our competitors.
Although we believe our magazines and videos are well-established in
the adult entertainment industry, we compete with entities selling adult
oriented products in retail stores, as well as through direct marketing. Many of
these products are similar to ours.
Over the past few years, the adult entertainment industry has undergone
significant change. Traditional producers of softcore content as well as
mainstream providers of media content have shifted to producing hardcore
content. As a result, we face greater competition to distribute hardcore
content. This shift has also led to industry consolidation, creating fewer, more
financially formidable competitors.
MAGAZINES
We meet with minimal direct competition from other publishers of
hardcore adult magazines and paperback books. We believe that our print
publications are dissimilar to other adult publications in style and format. The
only similar business of which we are aware was represented by Rodox N.V., a
Dutch/ Danish corporation, which recently decided to discontinue its publishing
operation. We do not believe there is presently any significant competition in
this segment of our business. Magazines such as Playboy and Penthouse and
similar
- 20 -
print publications do not compete directly with our publications, since we
consider them to be softcore publications. There are several hardcore
publications in each country where our magazines are sold. In general, these
are printed in limited editions and are of lower quality than our publications.
VIDEO AND DVD
The distribution of adult entertainment videocassettes and DVDs is a
highly competitive business. Each format competes with the other as well as with
other forms of entertainment. Revenue generation for motion picture
entertainment products depends, in part, upon general economic conditions, but
the competitive position of a producer or distributor is still greatly affected
by the quality of, and public response to, the entertainment product it makes
available to the marketplace. Competition arises from established adult video
producers and from independent companies distributing low-quality material.
Our primary competitors in the movie industry are adult motion picture
studios, with in-house production and post-production capabilities. These
include U.S. producers such as Video Company of America and Vivid Film, owned by
Playboy, as well as Wicked Pictures, Evil Angel Productions and Metro Global
Media Inc. Other competitors are smaller, but locally or regionally they are
capable of quickly identifying niche markets that could compete for our
customers. In addition, we also compete with other forms of media, including
broadcast, cable and satellite television, direct marketing, electronic media
and adult entertainment websites.
BROADCASTING
The distribution of adult movies on cable and satellite television
systems and hotel pay-per-view systems is highly competitive. Competition in
this area is increasing in line with increasing consumer demand for hardcore
adult entertainment generally. Our strongest geographical market position for
cable and television and distribution is in Europe, with our adult channels,
Private Gold and Private Blue, and licensing arrangements with established
European television networks, such as Canal+.
The strength of consumer demand for adult oriented cable programming is
evidenced by the acquisition by Playboy of two hardcore U.S. cable channels from
Vivid Film in July 2001. Until recently, Playboy's business has been largely
confined to softcore adult entertainment and it has resisted entry into hardcore
markets. Competition in this market has also been impacted by an increase in the
number and availability of satellite direct-to-home transmission channels. Our
cable and satellite television activities in the United States to date have been
limited to licensing our content to channel operators, such as Playboy.
In licensing, we experience competition from our video and DVD
competitors. Our position in U.S. markets is not well established, and
competition in this market is strong.
In the United States, cable companies such as Time Warner Cable,
TeleCommunications, Inc., or TCI and Cablevision Systems offer softcore services
like the Playboy Channel. Other cable companies like American Cable
Entertainment, Comcast Corporation and Greater Media offer explicit adult
programming, such as that available from Spice and Exxxtasy Networks.
The four largest cable providers are: TCI, Time Warner Cable, MediaOne
and Comcast. TCI is the largest U.S. cable provider. In addition to softcore
channels such as Playboy TV, AdulTVision, Spice Channel and The Adam & Eve
Channel, there are seven hardcore video channels available in the U.S.
exclusively on C-Band satellite television dishes, which are: Eurotica,
Exotica, Exxxtasy, True Blue, X!, Xxxcite and XXXplore. Exotica, Exxxtasy and
True Blue (offered by New Frontier Media, Inc.) offer uncensored hardcore
material. Exxxtasy is the only U.S. hardcore adult channel being broadcast to
Australia and the Pacific Rim.
We have only recently entered the hotel pay-per-view market, which is
an extremely competitive market. This is due primarily to our unwillingness to
enter into a typical hotel pay-per-view agreement, which requires a
- 21 -
licensor such as Private Media Group to license the movies to a hotel provider
on a fixed fee basis for each movie or video. We have recently entered into
license agreements with a major hotel chain which provides for license fees
based upon the number of rooms they service, and we are now intensifying our
efforts to penetrate this segment of the market.
INTERNET
The Internet market for adult oriented content is expanding quickly.
There are numerous adult media content websites competing with ours, most of
which are free. Although consumer access to free websites may cause us to limit
our ability to raise our prices, we see our chief competitors as adult pay
websites that charge for their services and are operated by companies that
possess global distribution, broadcasting and branding. Currently, there are few
companies that fit this description, including Playboy.com, Penthouse.com and
Vividvideo.com.
EMPLOYEES
As of December 31, 1999, 2000 and 2001 we employed 89, 118 and 142
people, respectively, on a full-time basis.
Our full-time editorial and post-production staff consists of an
editor-in-chief, six executive editors and approximately seven editors,
associate editors and assistant editors who oversee the quality and consistency
of the artwork and editorial copy and manage the production schedule of each
issue. The production of each issue requires the editors to coordinate the
activities of a writer, a pencil artist, an inker, a colorist and a printer over
a two-month period. The majority of this work is performed on our premises in
Barcelona, Spain.
The photographers and directors consist of freelancers who generally
receive a flat fee. We have entered into agreements with some photographers,
movie directors and writers under which such people have agreed to provide their
services to us on an exclusive basis, generally for a period of one to three
years.
We believe that we have a good relationship with our employees.
Currently, none of our employees is represented by a labor union.
GOVERNMENT REGULATION
We operate in a highly regulated industry. This requires us to be
socially aware and sensitive to government strictures, including laws and
regulations designed to protect minors or which prohibit the distribution of
obscene material. We take great care to comply with all applicable governmental
laws and regulations in each jurisdiction where we conduct business. Moreover,
we do not knowingly engage the services of any business or individual that does
not adhere to the same standards. Since 1965, we have never been held to have
violated any laws or regulations regarding obscenity or the protection of
minors.
REGULATION OF THE ADULT ENTERTAINMENT INDUSTRY IN THE U.S.
The following is a description of some of the laws and regulations in
the United States which impact the adult entertainment industry. It is not an
exhaustive description of all such laws. Moreover, we conduct business in over
35 countries around the world, each of which has its own regulatory framework.
This regulatory environment is constantly changing in the geographical areas in
which we conduct business, and in some instances laws which are enacted are
subsequently determined by the courts to be unconstitutional.
The Classification and Rating Administration of the Motion Picture
Association of America, MPAA, a motion picture industry trade association,
assigns ratings for age group suitability for theatrical and home video
distribution of motion pictures. Submission of a motion picture to the MPAA for
rating is voluntary, and we do not submit our motion pictures to the MPAA for
review. However, with the exception of several titles which have been
- 22 -
re-edited for cable television, most of the movies distributed by us, if so
rated, would most likely fall into the NC-17 - No Children Under 17 Admitted
rating category because of their depiction of nudity and sexually explicit
content.
The right to distribute adult videocassettes, magazines and DVD
products in the United States is protected by the First and Fourteenth
Amendments to the United States Constitution, which prohibits Congress or the
several States from passing any law abridging the freedom of speech.
The First and Fourteenth Amendments, however, do not protect the
dissemination of obscene material, and several states and communities in which
our products are distributed have enacted laws regulating the distribution of
obscene material, with some offenses designated as misdemeanors and others as
felonies, depending on numerous factors. The consequences for violating these
state statutes are as varied as the number of states enacting them. Similarly,
specific U.S. federal regulations prohibit the dissemination of obscene
material. The potential penalties for individuals (including directors, officers
and employees) violating the Federal obscenity laws include fines, community
service, probation, forfeiture of assets and incarceration. The range of
possible sentences requires calculations under the Federal Sentencing
Guidelines, and the amount of the fine and the length of the period of the
incarceration under those guidelines are calculated based upon the retail value
of the unprotected materials. Also taken into account in determining the amount
of the fine, length of incarceration or other possible penalty are whether the
person accepts responsibility for his or her actions, whether the person was a
minimal or minor participant in the criminal activity, whether the person was an
organizer, leader, manager or supervisor, whether multiple counts were involved,
whether the person provided substantial assistance to the government, and
whether the person has a prior criminal history. In addition Federal law
provides for the forfeiture of: (1) any obscene material produced, transported,
mailed, shipped or received in violation of the obscenity laws; (2) any
property, real or personal, constituting or traceable to gross profits or other
proceeds obtained from such offense; and (3) any property, real or personal,
used or intended to be used to commit or to promote the commission of such
offense, if the court in its discretion so determines, taking into consideration
the nature, scope and proportionality of the use of the property in the offense.
With respect to the realm of potential penalties facing an organization
such as ours, the forfeiture provisions detailed above apply to corporate assets
falling under the statute. In addition, a fine may be imposed, the amount of
which is tied to the pecuniary gain to the organization from the offense or
determined by a fine table tied to the severity of the offense. Also factored
into determining the amount of the fine are the number of individuals in the
organization and whether an individual with substantial authority participated
in, condoned, or was willfully ignorant of the offense; whether the organization
had an effective program to prevent and detect violations of the law; and
whether the organization cooperated in the investigation and accepted
responsibility for its criminal conduct. In addition, the organization may be
subject to a term of probation of up to five years.
Federal and state obscenity laws define the legality or illegality of
materials by reference to the U.S. Supreme Court's three-prong test set forth in
Miller v. California, 413 U.S. 1593 (1973). This test is used to evaluate
whether materials are obscene and therefore subject to regulation. Miller
provides that the following must be considered: (a) whether the average person,
applying contemporary community standards would find that the work, taken as a
whole, appeals to the prurient interest; (b) whether the work depicts or
describes, in a patently offensive way, sexual conduct specifically defined by
the applicable state law; and (c) whether the work, taken as a whole, lacks
serious literary, artistic, political or scientific value. The Supreme Court has
clarified the Miller test in recent years, advising that the prurient interest
prong and patent offensiveness prong must be measured against the standards of
an average person, applying contemporary community standards, while the value
prong of the test is to be judged according to a reasonable person standard.
We are engaged in the wholesale distribution of our products to U.S.
wholesalers and/or retailers. We have taken steps to ensure compliance with all
Federal, State and local regulations regulating the content of motion pictures
and print products, by staying abreast of all legal developments in the areas in
which motion pictures and print products are distributed and by specifically
avoiding distribution of motion pictures and print products in
- 23 -
areas where the local standards clearly or potentially prohibit these products.
In light of our efforts to review, regulate and restrict the distribution of
our materials, we believe that the distribution of our products does not
violate any statutes or regulations.
Many of the communities in the areas in which we offer or intend to
offer products or franchises, have enacted zoning ordinances restricting the
retail sale of adult entertainment products. We supply products only in
locations where the retail sale of adult entertainment products is permitted.
In February 1996, the U.S. Congress passed the Telecommunications Act.
Some provisions of the Telecommunications Act are directed exclusively at cable
programming in general and adult cable programming in particular. In some cable
systems, audio or momentary bits of video of premium or pay-per-view channels
may accidentally become available to non-subscribing cable customers. This is
called bleeding. The practical effect of Section 505 of the Telecommunications
Act is to require many existing cable systems to employ additional blocking
technology in every household in every cable system that offers adult
programming, whether or not customers request it or need it, to prevent any
possibility of bleeding, or to restrict the period during which the programming
is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the
Telecommunications Act are significant and include fines and imprisonment.
Surveying of cable operators and initial results indicate that most will choose
to comply with Section 505 by restricting the hours of transmission. We believe
that our revenues will be marginally adversely affected as a result of
enforcement of
Section 505. However, as digital technology (which is unaffected by Section
505) becomes more available, we believe that ultimately the impact will be
insignificant.
As discussed above, federal and state government officials have
targeted sin industries, such as tobacco, alcohol, and adult entertainment for
special tax treatment and legislation. In 1996, U.S. Congress passed the
Communications Decency Act of 1996, or the CDA. Recently, the U.S. Supreme
Court, in ACLU v. Reno, held certain substantive provisions of the CDA
unconstitutional. Businesses in the adult entertainment and programming
industries expended millions of dollars in legal and other fees in overturning
the CDA. Investors should understand that the adult entertainment industry may
continue to be a target for legislation. In the event we must defend ourselves
and/or join with other companies in the adult programming business to protect
our rights, we may incur significant expenses that could have a material adverse
effect on our business and operating results.
Child Pornography and Non-Mainstream Content
We believe that roughly 90% of the adult material produced and
distributed over the past 15 years contains mainstream sexual acts between
consenting adults. The rest could be classified as specialty material which does
not contain explicit sex, but which still involves consenting adults (i.e.
fetish, bondage, etc.). Mainstream sex acts means intercourse, oral sex, anal
sex, group sex, etc. Our adult movies do not contain any depictions, let alone
actual performances of rape, sex with coercion, animals, urination, defecation,
violence, incest or child pornography.
Since 1990, the Free Speech Coalition has worked with the U.S.
government to create a workable regulatory system designated to prevent minors
from working in the adult industry. Child Protection Restoration and Penalties
Enhancement Act of 1990 (18 U.S.C. section 2257) requires, in essence, that no
one can work without having copies of their passport or driver's license, and a
declaration under perjury of their age and true name, on file with a designated
Custodian of Records, and available for inspection by law enforcement.
As indicated above, all of our products are all in compliance with 18
U.S.C. Section 2257 and all models performing in our productions are 18 years of
age or older.
INTERNET REGULATION
- 24 -
Government regulation of the Internet is a rapidly developing area and,
therefore, adds additional uncertainty to our business. New laws or regulations
relating to the Internet, or more aggressive application of existing laws, could
decrease the growth of our websites, prevent us from making our content
available in various jurisdictions or otherwise have a material adverse effect
on our business, financial condition and operating results. These new laws or
regulations could relate to liability for information retrieved from or
transmitted over the Internet, taxation, user privacy and other matters relating
to our products and services. For example, the U.S. government has recently
enacted laws regarding website privacy, copyrights and taxation. Moreover, the
application to the Internet of other existing laws governing issues such as
intellectual property ownership and infringement, pornography, obscenity, libel,
employment and personal privacy is uncertain and developing.
Regulation of the Internet outside the United States
We may also be subject to claims based upon the content that is
available on our websites through links to other sites and in jurisdictions that
we have not previously distributed content in. For example, a recent French
ruling banning the sale of Nazi memorabilia in France suggests that website
operators may be forced to undertake expensive security measures to block
certain users or face significant fines. Implementing such security measures to
reduce our exposure to this liability may require us to take steps that would
substantially limit the attractiveness of our websites and/or their availability
in various geographic areas, which could negatively impact their ability to
generate revenue.
Regulation of the Internet Gaming Industry
We recently entered into a licensing and profit revenue sharing
agreement with an online gaming company that offers sports betting and
casino-style games online from facilities located outside the United States. In
return for licensing our trade names and media content, we will receive a
portion of the revenues derived from such gaming activities. Under this
agreement, the online gaming company is responsible for compliance with all
applicable laws and regulations governing its gaming services. We may
nevertheless be deemed to be a principal in this venture and may be subject to
the gaming related laws and regulations of each jurisdiction in which the online
gaming company conducts its business. The application of these laws and
regulations and the level of enforcement has been sporadic and the regulatory
climate is uncertain. However, online sports and casino betting is unlawful in
all states of the United States and very likely under any of several U.S.
federal laws. Successful prosecutions have been brought at the state and federal
level on both a corporate and individual basis. Accordingly, we risk possible
prosecution as either a direct principal or on an aiding and abetting theory.
Any prosecution in the United States or in other countries could have material
adverse effect on our business, results or operations and financial condition.
Finally, to the extent that we fail to qualify to do business as a
foreign corporation in any state or jurisdiction that requires such
qualification due to the availability of our online gaming and other activities
within that state or jurisdiction, we could be subjected to a variety of
penalties including fines on a corporate and individual level, an inability to
enforce contracts and, in several jurisdictions, imprisonment. Any such
penalties could have a material adverse effect on our business, results of
operation and financial condition.
SEASONALITY
Our businesses are generally not seasonal in nature. However, June,
July and August are typically impacted by smaller orders from some European and
U.S. distributors, due to the holiday season, while November and December sales
are generally higher due to the printing of special issues such as The Best of
Private.
- 25 -
ITEM 2. DESCRIPTION OF PROPERTIES
PROPERTIES
In 1997, we relocated our principal administrative and operating
offices from Stockholm to Barcelona. The Barcelona facility houses our
administrative, editorial and operational offices, the data center, customer
service, and some of the warehouse and fulfillment facilities. With the
acquisition of our French distributor at the end of 1997, we also inherited some
office space in Paris, France. Currently, we lease office space in Barcelona,
Spain, Knegsel, the Netherlands, and Paris, France.
Since May 27, 1997, Milcap Media Group is a lessee under an initial
five-year term representing its operating corporate office. The lease was
effective from the May 27, 1997. It is located at Carretera de Rubi 22-26, 08190
Sant Cugat del Valles, Barcelona, Spain. Average monthly base rental expense is
approximately $ 13,400. We recognize the rent expense on a straight-line basis
over the extended term of the lease. Additionally, the lease requires us to pay
our proportionate share of the building's real estate taxes and operating
expenses. The majority of this space is used by all of our operating groups,
primarily for post production.
Private Benelux is the lessee under a lease which terminates on July
31, 2006 and July 31, 2008 located in Knegsel. Average monthly base rental
expense is approximately $ 2,716. We recognize the rent expense on a
straight-line basis over the extended term of the lease. Additionally, the lease
requires us to pay our proportionate share of the building's real estate taxes
and operating expenses. We use the majority of this space for operating our
distribution in the Benelux countries.
Private France is the lessee under an expired term lease, which is now
currently month-to-month, for approximately 50 square meters of corporate
headquarters space located at 17, rue Charles de Gaulle -78680 Epone, France.
Subsequent to the term of the lease, the average monthly base rental expense is
approximately $ 1,001. The rent expense is being charged to operations, on a
monthly basis.
Private North America is the lessee under a lease effective April 1,
2001, with a term of five years, for a 21,500 square foot office and warehouse
facility located in Sun Valley, California. Average monthly base rental expense
is $ 11,200, which amount increases by $ 400 on an annual basis. The rent
expense is being charged to operations on a monthly basis. Additionally, the
lease requires us to pay our proportionate share of the building's real estate
taxes and operating expenses. Private Media Group maintains an office in the
United States at 3230 Flamingo Road, Suite 156, Las Vegas, Nevada 89121.
Presently, no office space is rented and the above address is simply a mailing
address.
- 26 -
ITEM 3. LEGAL PROCEEDINGS
On June 7, 1999 the Swedish tax authority, Skattemyndigheten i
Stockholm, instituted a proceeding against Milcap Media Limited, our wholly
owned subsidiary, in the Administrative Court in Stockholm to seize assets as
security in the event that the tax authority issues an assessment for corporate
income tax against Milcap Media Limited. Although no tax assessment had been
issued at that time, the Swedish tax authority alleged that Milcap Media Limited
had a permanent establishment in Sweden and failed to withhold payroll tax, and
therefore owed corporate income and payroll withholding taxes in Sweden for the
income tax years 1995, 1996, 1997 and 1998. We believe that the opinion of the
tax authority is without legal basis, as Milcap Media Limited conducts no
operations in Sweden and has no permanent establishment in Sweden. Accordingly,
we believe that the opinion of the tax authority is incorrect and that no tax
will be due when the case is finally determined.
For purposes of the seizure proceedings, the tax authority has filed a
seizure request for an arbitrary amount of SEK 17.7 million, which is not based
upon the actual financial results of Milcap Media Limited. As a consequence, the
Swedish tax authority has filed and obtained an order from the Administrative
Court in Stockholm, without prior notice to Milcap Media Limited, to seize
assets of Milcap Media Limited having a value of up to SEK 17.7 million.
On December 20, 1999, Milcap Media Limited received an official
notification from the tax authority with a statement that the tax authority had
arbitrarily assessed Milcap Media Limited with income for the tax years
mentioned above for a total amount of SEK 150 million, which is not based upon
the actual financial results of Milcap Media Limited. The effective tax on the
arbitrary income assessment would amount to around SEK 42 million plus fines of
SEK 16.8 million. In addition, interest, which could be significant, is payable
on those amounts. However, Milcap Media Limited is appealing the assessment to
the Administrative Court in Stockholm. The final outcome of the appeal is
expected to take several years and we have applied for a postponement of payment
of the taxes and fees until the case is settled. No final decision has been
given.
In March 2000, Milcap Media Group entered into an agreement with a
construction contractor, ACOMO S.L., providing for the construction of a new
office building and warehouse facility located in Barcelona, Spain. Under the
terms of the agreement, Acomo was to construct the facility and transfer title
to the land and building to Milcap Media Group for a total purchase price of
approximately 2,705 million pesetas, approximately SEK 149.3 million.
Subsequently, Milcap Media Group entered into an agreement with Viosland Trade
S.L., a company deemed to be controlled by our principal shareholder, whereby
Viosland agreed to acquire Milcap Media Group's interest in the project and to
assume all financial obligations to Acomo. Milcap Media Group granted a
guarantee to Acomo in the event of non-payment by Viosland. As of June 30, 2001,
972 million pesetas, approximately SEK 53.7 million, has been paid to Acomo in
respect of construction in progress.
In July 2001, Acomo filed a civil action against Milcap Media Group and
Viosland in Barcelona (Common Trial N. 298/2001) for approximately 479 million
pesetas, approximately SEK 26,4 million, which Acomo claims is due for payment
under the agreement, plus all future amounts which may fall due for payment over
the course of the agreement. Milcap Media Group has filed an answer to this
action, contending, among other things, that Acomo has not complied with some
terms in the agreement and that accordingly no payment has fallen due. On
December 21, 2001, an agreement before the judge was reached between Milcap
Media Group and Acomo. On January 25, 2002 notification of the formal resolution
issued by the judge ratifying the agreement was received. With this agreement
Milcap Media Group recovers the rights over the construction from Viosland Trade
S.L., and enables it to assign these rights to a third party. Accordingly,
Milcap assigned the rights over the building to Ceresland SL, an affiliate of
Berth Milton, on January 30, 2002. Finally, on March 21, 2002, the deed of
purchase of the building was signed before the Public Notary between Acomo SL
and Ceresland SL.
We are from time to time a defendant in suits for defamation and
violation of rights of privacy, many of which allege substantial or unspecified
damages, which we vigorously defend.
We are presently engaged in litigation, most of which is generally
incidental to the normal conduct of our business and is immaterial in amount. We
believe that our reserves are adequate and that no such action will have a
- 27 -
material adverse impact on our financial condition. However, there can be no
assurance that our ultimate liability will not exceed our reserves.
Except as disclosed above, neither Private Media Group, Inc. nor its
subsidiaries is or has been, during the last two fiscal years, involved in any
other litigation or arbitration proceedings which have had or might have a
material influence on our financial condition or results of operations, nor are
we aware of any such proceedings pending or being threatened.
- 28 -
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR PRIVATE MEDIA GROUP, INC. COMMON STOCK
The common stock of Private Media Group, Inc. has traded on the Nasdaq
National Market since February 1, 1999 under the symbol "PRVT". Previously, our
common stock traded on the NASD, Inc. OTC Bulletin Board since March 29, 1996.
The following table sets forth the range of representative high and low bid
prices for the common stock for the periods indicated, as reported by the Nasdaq
National Market. Quotations represent inter-dealer prices, do not include retail
markups, markdowns or commissions and may not represent actual transactions.
High Low
---- ---
Fiscal 2001:
First Quarter............................ $8.88 $4.94
Second Quarter........................... $9.40 $4.54
Third Quarter............................ $9.84 $6.46
Fourth Quarter........................... $9.80 $7.05
Fiscal 2000:
First Quarter............................ $13.00 $5.82
Second Quarter........................... $12.63 $8.19
Third Quarter............................ $10.13 $5.38
Fourth Quarter........................... $10.93 $5.75
Fiscal 1999
First Quarter (from February 1, 1999).... $4.83 $3.43
Second Quarter........................... $8.93 $4.13
Third Quarter............................ $6.93 $3.93
Fourth Quarter........................... $6.50 $4.50
- 29 -
On March 14, 2002, the last sales price reported on the Nasdaq National
Market was $6.44. On December 17, 2001, there were approximately 1,400
beneficial owners of our common stock.
DIVIDEND POLICY
We did not pay any cash dividends during our last fiscal year and we do
not contemplate doing so in the near future. We currently intend to retain all
earnings to finance the development and expansion of our operations, and do not
anticipate paying cash dividends on our shares of common stock in the
foreseeable future. Our future dividend policy will be determined by our Board
of Directors on the basis of various factors, including results of operations,
financial condition, business opportunities and capital requirements. The
payment of dividends will also be subject to the requirements of Nevada Law, as
well as restrictive financial covenants which may be required in credit
agreements.
STOCK DIVIDEND
We implemented a 3:1 stock dividend whereby each holder of record of
our common stock on May 30, 2000, received two additional shares of common stock
for each share owned on the record date. Corresponding adjustments have been
made to the warrants and options outstanding on the record date as well as the
Series A Preferred Stock to reflect adjusted conversion and dividend terms.
Accordingly, all share and per share values reflected have been adjusted to give
effect to the stock dividend.
TRANSFER AGENT
The transfer agent and registrar for our common stock is InterWest
Transfer Co., Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.
MISCELLANEOUS
In July, 2000, our common stock was added to the Russell 2000 and 3000
Index.
- 30 -
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial
information for the five years ended December 31, 2001. The selected financial
information has been derived from our consolidated financial statements which
have been audited by Ernst & Young AB, independent auditors.
This selected consolidated financial information should be read along
with our historical consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in or appearing elsewhere in this Report.
Years ended December 31,
-----------------------------------------------------------------------------
2001 2001 2000/(1)/ 1999/(1)/ 1998/(1)/ 1997/(2)/
----------- ----------- ----------- ----------- ----------- ------------
USD SEK SEK SEK SEK SEK
(in thousands, except per share data)
Statement of Income Data:
Net sales ..................................... 33,799 360,632 258,084 175,426 166,317 144,543
Cost of sales ................................. 11,990 127,928 98,770 84,624 72,851 75,674
----------- ----------- ----------- ----------- ----------- -----------
Gross Profit .................................. 21,809 232,704 159,314 90,802 93,465 68,869
Selling, general and administrative expenses... 14,525 154,963 96,878 65,661 53,738 33,682
Offering expenses .............................