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November 15, 2005 08:41am
Private Reports Break-Even
Source: Private Media Group, Inc.
by: Company Press Release

(BARCELONA, SPAIN) -- Private Media Group Inc. (NASDAQ: PRVT) a worldwide leader in premium-quality adult entertainment products, services and Internet content, today announced its results for the nine-month period ending September 30, 2005.
The Company reported a decrease in sales of 9.0 million euro, to 20.8 million euro for the nine month period ended September 30, 2005. Net income was 0.0 million euro for the nine month period compared to 2.6 million euro for the same period last year.

DVD sales decreased 4.6 million euro, or 29%, to 11.4 million euro. The decrease in DVD sales was primarily due to three factors: (a) one month's loss of sales of new releases, equal to approximately 1.0 million euro, as a result of our DVD duplicator/supplier suffering a logistics and delivery breakdown in February 2005, (b) a non-recurring sale of inventory of Eur 1.3 million in 2004 to our new Us distributor and (c) the effect of outsourcing arrangements in the Us where the Company now report sales net of agent's commission. Although the outsourcing in the Us has a negative effect on sales, the restructuring has increased operating profit in 2005 when compared to 2004. In the nine month period, the negative impact of reporting Us sales net of agent's commission was 1.6 million euro.

Video sales decreased 2.0 million euro, or 89%, to 0.3 million euro compared to the same period in 2004. The decrease in sales was the result of a general industry decrease in Video sales due to the consumer migration from Video to DVD.

Magazine sales decreased 0.9 million euro, or 22% to 3.1 million euro as a result of lower quantities sold during the nine month period, in line with the Company's expectations. Internet sales decreased 0.9 million euro, or 24%, to 3.1 million euro, a direct result of the closing down of the third party payment processor for Us transactions. Subsequently, the Company temporarily transferred its Us transactions to its payment processor for the European market and a decrease in volume was noted. As of July 2005 the Company has a new payment processor for Us online transactions. In addition to the reorganization of Us payments, the Company has also been experiencing lower conversion rates as result of new, securer - but less user-friendly - payment processes for credit cards, e.g. Verified by Visa. It is the Company's belief that conversion rates will revert to prior levels as consumers get used to the new payment processes. Broadcasting sales decreased 0.6 million euro , or 16%, to 3.0 million euro as a result of lower content licensing sales, offset by an increase in mobile content and Vod sales in the period. (see discussion under comment below)

For the nine months ended September 30, 2005, the Company achieved a gross profit of 9.0 million euro, or 43% of net sales, compared to 16.0 million euro, or 54% of net sales for the same period last year. The decrease in gross profit as a percentage of sales was primarily the result of lower high margin sales e.g., Internet and Broadcasting, and the effect of amortization of library, which does not vary with sales.

Selling, general and administrative expenses were 10.4 million euro for the period compared to 13.3 million euro year-on-year, a decrease of 2.9 million euro, or 22%. The decrease is primarily the result of reductions in bad debt expense and depreciation, and the outsourcing of distribution in the United States, offset by non-recurring expenses of 0.5 million euro related to a weekly publication which was launched and discontinued during the period.

During the period the remaining part of the real estate property in Barcelona, Spain, was sold at a profit of 1.3 million euro. The consideration under the agreement was 6.9 million euro, of which 3.4 million had been received as of September 2005. The balance of the consideration due, amounting to 3.5 million euro, was received in November 2005. Part of the proceeds from the sale were used to repay the outstanding balance of 1.3 million euro on the loan related to the building.

Operating profit. The Company reported an operating loss of 0.2 million euro for the nine months ended September 30, 2005 compared to an operating profit of 2.7 million euro for the same period last year. The decrease is the result of lower gross profit, albeit offset by reduced selling, general and administrative expenses and gain on sale of building.

Commenting on some important factors relating to the business going forward, Private Media Group, Inc., CFO, Johan Gillborg stated: "During the nine-month period ending September 30, 2005 we increased our investment in our library of photographs and videos by 82% compared to the same period in 2004 and subsequently we will release more new proprietary movie titles going forward1. In the fourth quarter of 2005 the increase in new proprietary releases will be 188% compared to the same period last year and during the nine-month period ending June 30, 2006 we plan to release 92% more new proprietary movie titles compared to the same period ending June 30, 2005. We expect the increase of new movie releases in 2005 and 2006 to result in increased DVD sales and also expect margins on these DVD sales to improve since additional new releases available for sale increases the average sales price per unit.

"In addition to the increase of proprietary movie titles available for sale, we are also consolidating the distribution in Europe of third party DVD content from Tera Patrick's TeraVision as from January 2006. This third party content distribution requires no investment from us and complements our proprietary content. We expect this also to increase DVD sales and contribute to gross profit.

"We expect magazine sales to remain steady at the current three-month period level going forward. With Internet, a high-margin business, we have contracted a third-party to increase profitable traffic to our sites through a program that commenced running in May. It involves developing our sites from a Search Engine Optimization (SEO) perspective and creating an affiliate program for webmasters around the world, called Private Cash. During the third quarter the number of unique visits to our main sites increased by 50% compared to the same quarter last year and for the month of October 2005 this trend continued. Historically, we have not carried out any of the above activities and going forward we expect the SEO and the affiliate program to increase Internet sales from both memberships and our online shop.

"In the Broadcast arena, and during the second quarter of 2005, we made an agreement with Playboy TV Latin America for the operation and distribution of Private branded TV channels in Latin America. With this new agreement we are significantly increasing our broadcasting presence in this region and in the fourth quarter of 2005 we expect to start seeing an impact on our revenues from the region.

"In the third quarter we made an agreement with a member of the Portland Television Group of companies for the launch of a new Private channel in the UK. This fresh new channel will be launched in January 2006 and replace the Private Blue channel, which was established in the UK in 2000. The new channel will primarily be available as a pay-per-view channel via the BSkyB Digital Satellite platform. The BSkyB platform currently carries more than 7.4 million subscribers. We expect this new channel to start having an impact on profits during the first half of 2006.

"During the third quarter we have also seen evidence of an emerging new source of significant future profits for us in the True Video on Demand (TVOD2) market in Europe. Revenues from our one of our distributors on this type of platform have increased steadily during the nine-month period ending September 30, 2005 and the growth in our revenues has been in line with the subscriber growth on this new Vod platform. During the third quarter of this year, revenues from this platform increased 200% compared to the preceding quarter. We have reason to believe that our revenue will continue to grow in line with the forecasted subscriber growth on this new Vod platform and subsequently we expect a contribution to operating profit of not less than Eur 0.5 million for 2006 from this new distributor. Furthermore, we expect to contract additional TVOD distribution platforms in Europe in 2006.

"Included within broadcasting are our sales of mobile content. During the second quarter of 2005, we created a dedicated mobile content department headed up by Tim Clausen, formerly with T-Mobile International in London. This new development has launched us into a new era, gaining carriage with mobile network operators, and we are currently in the process of expanding our business in this market by launching our content with every major network operator in Western Europe. This will enable us to leverage our unique range of content, our trademarks and our huge existing customer base to take our mobile presence in Europe to a truly market dominant position. During the third quarter revenues from this distribution channel increased 80% compared to the same quarter last year. The increase is related to revenues from intensified business activities with network operators in Europe. During the fourth quarter we expect we expect increased revenues from more than 20 additional network operators. As of January 2006 we expect to have covered the entire West European network operator market and that the creation of our dedicated mobile content department will have a significant impact on broadcasting revenues and operating profit in 2006.

"We are currently unable to determine what our potential revenue will be from the marketing of our content to the mobile adult content market. However, we believe that adult content, as it has done with other new technologies, will help to drive the sale of content on mobile devices3.", Mr. Gillborg concluded.

Financial Highlights

About Private Media Group with its 40 year track record, Private is a leading global adult entertainment company that distributes its content over a wide range of media platforms, including narrow and broadband Internet, DVD and video, magazines, broadcasting and wireless technologies. It owns the worldwide rights to the largest archive of high quality adult content in the world, which it physically distributes in over 40 countries.

Disclaimer This release contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Company's current judgments of those issues. However, because those statements are forward-looking and apply to future events, they are subject to such risks and uncertainties, which could lead to results materially different than anticipated by the Company.

For further information please contact

Alejandra Moore Mayorga
Tel +34 91 531 23 88

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