ASC 6.67% 1.6¢ limited

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    Sextailer faces probe

    By Neale Prior

    THE Australian Stock Exchange yesterday launched an investigation into the circumstances surrounding's shock announcement on Thursday night of a downturn in its online pornography operations. is understood to have received notice of the probe at its Roe Street, Perth, headquarters about 2.30pm yesterday in the wake of a tumultuous day's trading in which the company's share price was slashed by more than half.

    It is believed exchange investigators are examining issues relating to disclosure about problems at its online pornography operations that resulted in the company backing away from bullish earnings and cash flow forecasts made in May.

    It is also thought the Australian Securities & Investments Commission is not involved but the matter could be referred to the government regulator for investigation if stock exchange officers are not satisfied with explanations given by management.

    An exchange spokesman said the probe was a matter of priority.

    In a remarkable series of events, AdultShop announced on Thursday night that it had marginally beaten forecasts made in May for the year to June 30 by reporting a profit of $5.7 million and cash holdings of $17.5 million.

    But it unveiled a horror turnaround in the operational performance of its cash-generating online pornography operations in the current quarter for reasons, including cash reserves being held in escrow by an international credit card processor formerly used by the company.

    The company's shares plunged from 23.5¢ to 10¢ yesterday, losing all the gains enjoyed after its May profit forecast and from its apparently successful acquisition of the Today's Success pornography operations in late 2000-01.

    On Thursday night, AdultShop backed away from a forecast of a net profit of $11.6 million for the December half and instead projected EBITDA (earnings before interest, tax, depreciation and amortisation) of $1 million to $2 million.

    It also forecast its cash reserves would fall to the $10 million to $12 million range.

    AdultShop said the exceptional growth in the online pornography operations in the half year to June 30 had caused an increase in credit card processing costs, including levies for rejected transactions.

    It had outsourced its billing system in the past fortnight to protect its business. chief executive Malcolm Day would not return calls from The West Australian yesterday.

    Chairman Reg Gillard said he could not comment and everyone would be busy over the weekend preparing responses to the stock exchange.

    The internet pornography operations had usually offered subscribers a short period of free access before they would be billed for monthly access to sites, often at a cost of up to $US49.95 ($90) and with multiple bills if extra services were accessed.

    The company's online pornography operation is believed to have been one of the biggest payers on the internet last year to other website operators who directed new members to its sites, paying up to $75 for each referral that led to memberships.

    AdultShop said on Thursday a more stringent membership validation process had substantially reduced its membership database, but it was in the process of renewed growth.

    It said revenue would be down in the December half. Costs, particularly membership acquisition expenses, would reduce but at a smaller proportion.

    It remained confident of the long-term profitability from its pornography operations.

    "The directors caution that the length of the entertainment division's business cycle is such that they will not be in a position until November to better evaluate the results of the recent changes," AdultShop said.

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