SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) of the
Securities Exchange Act of 1934
Commission
For the Quarterly Period Ended September 30, 1996 File No. 33-76716
------------------ --------
General Media, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3750988
- -------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification Number)
277 Park Avenue, New York, NY 10172
- -------------------------------- ----------------------
(Address of Principal Executive Zip Code
Offices)
(212) 702-6000
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
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 preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 1996
----- --------------------------------
Common stock, $.01 par value 475,000
<PAGE>
GENERAL MEDIA , INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote
of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
<PAGE>
Item 1. Financial Statements
General Media, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues
Publishing
Newsstand $ 45,159 $ 40,814 $ 15,010 $ 13,319
Advertising 19,389 20,887 6,835 6,693
Subscription 9,500 8,786 3,503 2,844
Other 3,289 3,562 1,207 1,203
Entertainment 13,164 11,708 4,075 3,771
-------- -------- -------- --------
90,501 85,757 30,630 27,830
-------- -------- -------- --------
Operating costs and expenses
Publishing-production, distribution
and editorial 44,499 39,569 16,051 12,473
Entertainment- direct costs 7,174 5,999 2,143 2,009
Selling, general and administrative 37,475 33,060 11,941 10,542
Rent expense from affiliated companies 1,057 558 361 136
Depreciation and amortization 1,194 1,404 411 467
-------- -------- -------- --------
Total operating costs and expenses 91,399 80,590 30,907 25,627
-------- -------- -------- --------
Income (loss) from operations (898) 5,167 (277) 2,203
-------- -------- -------- --------
Other income (expense)
Interest expense (7,825) (7,431) (2,509) (2,478)
Interest income 459 188 67 53
-------- -------- -------- --------
Loss before extraordinary item (8,264) (2,076) (2,719) (222)
Extraordinary item
Gain on early retirement of debt 656 656
-------- -------- -------- --------
NET LOSS ($ 7,608) ($ 2,076) ($ 2,063) ($ 222)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
General Media, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
(amounts in thousands)
December 31, September 30,
1995 1996
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,380 $ 7,211
Accounts receivable, net of allowance
for doubtful accounts 13,089 11,689
Inventories 7,847 4,573
Prepaid expenses and other current assets 3,443 3,147
Due from affiliated companies 973 1,612
Loans to affiliate 995
-------- --------
Total current assets 29,732 29,227
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 5,592 4,961
OTHER ASSETS
Intangible assets, net 4,427 3,964
Deferred subscription aquisition costs 2,341 1,403
Deferred debt issuance costs, net 4,967 4,225
Loan to affiliated company 1,086 1,086
Other 1,362 1,361
-------- --------
14,183 12,039
-------- --------
$ 49,507 $ 46,227
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 12,869 $ 12,698
Deferred subscription revenue 14,179 10,937
Other liabilities and accrued expenses 6,226 9,225
-------- --------
Total current liabilities 33,274 32,860
SENIOR SECURED NOTES 79,112 79,245
UNEARNED REVENUE 7,390 6,467
COMMITMENTS AND CONTINGENCIES
REDEEMABLE WARRANTS 1,791 1,791
STOCKHOLDERS' DEFICIENCY
Common stock, $.01 par value; 1,000,000
shares; issued and outstanding, 475,000 shares 5 5
Capital in excess of par value 1,418 1,418
Accumulated distributions, net of retained earnings (73,483) (75,559)
-------- --------
(72,060) (74,136)
-------- --------
$ 49,507 $ 46,227
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
General Media, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
Nine months ended
September 30,
-------------
1995 1996
-------- -------
Cash flows from operating activities
Net loss ($ 7,608) ($2,076)
Adjustments to reconcile net loss to cash
provided by (used in ) operating activities
Extraordinary gain on early retirement of debt (656)
Depreciation and amortization 1,194 1,404
Amortization of debt issuance costs and discounts 914 875
Net change in operating assets and liabilities (5,192) 4,572
-------- -------
Net cash provided by (used in) operations (11,348) 4,775
-------- -------
Cash flows from investing activities
Capital expenditures (4,332) (310)
-------- -------
Net cash used in investing activities (4,332) (310)
-------- -------
Cash flows from financing activities
Advances to affiliated companies (1,372) (639)
Repayment of advances to affiliated companies 2,469
Loan to affiliate (995)
Payments from affiliated company 268
Repurchase of senior secured notes (4,050)
Unearned revenues received 5,000
-------- -------
Net cash provided by (used in) financing activities 2,315 (1,634)
-------- -------
Net increase (decrease) in cash and cash equivalents (13,365) 2,831
Cash and cash equivalents at beginning of period 19,202 4,380
-------- -------
Cash and cash equivalents at end of period $ 5,837 $ 7,211
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
General Media, Inc. and Subsidiaries
Notes to Condensed Consolidated
Financial Statements (Unaudited)
(amounts in thousands)
1. Basis of Preparation
General Media, Inc. (the "Company") is a wholly-owned subsidiary of General
Media International, Inc. ("GMI").
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. The balance sheet information for December 31,
1995 has been derived from the audited financial statements at that date.
2. Inventories
Inventories consist of the following:
December 31, September 30,
1995 1996
------------ -------------
Paper and printing $ 4,792 $ 2,470
Editorials and pictorial 1,785 1,826
Film and programming costs 2,483 1,316
------- -------
9,060 5,612
Less- LIFO allowance-paper and printing 1,213 1,039
------- -------
$ 7,847 $ 4,573
======= =======
Paper and printing costs are valued at the lower of cost (last-in, first-out
method) or market. Editorials and pictorials are valued at actual cost, which is
not greater than market. Film and programming costs are valued at the direct
cost of production, less amounts amortized over the expected period of revenue,
generally twelve months from the film release date.
6
<PAGE>
General Media, Inc. and Subsidiaries
Notes to Condensed Consolidated
Financial Statements (Unaudited)
(amounts in thousands)
3. Management Charge
The Company incurs shared common indirect expenses for the benefit of GMI and
affiliated companies, including accounting, personnel, data processing, employee
relations and other administrative services. In addition, the Company is charged
by GMI and its subsidiaries for the benefit of other corporate overhead costs,
executive compensation and other costs which principally relate to office space.
These allocations are based on factors determined by management of the Company
to be appropriate for the particular item, including estimated relative time
commitments of managerial personnel, relative number of employees and relative
square footage of all space occupied. Management believes that the allocation
method and amounts are reasonable.
4. Senior Secured Notes
In December 1993, the Company issued $85 million of Senior Secured Notes (the
"Notes") at an issue price equal to 99.387% of the principal amount of the
Notes. The Notes mature on December 31, 2000 and bear interest at 10-5/8% per
annum, which is payable semiannually. In July 1995, the Company repurchased $5.0
million face amount of its outstanding Notes, including 5,000 warrants, for cash
of $4.1 million.
The Notes are fully and unconditionally guaranteed, jointly and severally, by
each of the Company's direct and indirect subsidiaries (the "Subsidiary
Guarantors"). Each of the Subsidiary Guarantors is a wholly-owned subsidiary of
the Company. The Company is a holding company with no separate assets,
liabilities or operations other than its investment in its subsidiaries and the
Notes. Financial statements of the Subsidiary Guarantors have not been presented
because the aggregate assets, liabilities, operations and equity of the
Subsidiary Guarantors are substantially equivalent to the assets, liabilities,
operations and equity of the Company on a consolidated basis.
The Indenture contains covenants which, among other things, (i) restrict the
ability of the Company to dispose of assets, incur indebtedness, create liens
and make certain investments, (ii) require the Company to maintain a minimum
consolidated tangible net worth (deficiency) million, and (iii) restrict the
Company's ability to pay dividends unless certain financial performance tests
are met. The Subsidiary Guarantors are permitted to pay intercompany dividends
on their shares of common stock. The ability of the Company and its subsidiaries
to incur additional debt is severely limited by such covenants. As of September
30, 1996, the Company was in compliance with all such covenants.
Should the Company incur losses in the future, such that the Company's tangible
net worth (deficiency) declines below $81.2 million (currently $78.1 million)
for two consecutive quarters, the Company would be required to purchase on the
last day of the next following fiscal quarter, ten percent of the principal
amount of the Notes then outstanding at a price of 101% of the principal amount
thereof .
5. Statement of Cash Flows
Cash payments made for interest during the nine months ended September 30, 1996
and 1995 were $4,430,000 and $4,787,000, respectively.
7
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Several of the Company's businesses can experience fluctuations in quarterly
performance. For example, newsstand revenues vary from issue to issue with
higher revenues for special and higher priced issues and any issue including
editorial or pictorial features that generate unusual public interest. In
addition, revenues from the licensing of the Company's trademarks, products and
videos vary with the timing of new agreements. As a result, the Company's
performance in any quarterly period is not necessarily reflective of full-year
results.
The Company is currently engaged in activities in two industry segments:
publishing and entertainment. The publishing segment of the Company is engaged
in the publication of Penthouse magazine and six affiliate magazines (the
"Affiliate Publications"), the licensing of the Penthouse brand name to
publishers in foreign countries and the publication of four specialty automotive
magazines; Four Wheeler, Stock Car Racing, Open Wheel and Drag Racing Monthly.
The entertainment segment of the Company produces a number of adult-oriented
entertainment products, including pay-per-call telephone lines, video cassettes,
CD-ROM interactive products and internet services.
Results of Operations (Three Months Ended September 30, 1996 vs. 1995)
The Company's revenues were $27.8 million for the three months ended September
30, 1996, compared to revenues of $30.6 million for the three months ended
September 30, 1995, a decrease of $2.8 million. Newsstand revenues were $13.3
million and $15.0 million for the three months ended September 30, 1996 and
1995, respectively, a decrease of $1.7 million. Newsstand revenues for Mens
Magazines were $12.2 and $13.9 million for the three months ended September 30,
1996 and 1995, respectively, a decrease of $1.7 million. Newsstand revenues from
the Automotive magazines were $1.1 million for the three months ended September
30, 1996 and 1995. Advertising revenues were $6.7 million and $6.8 million for
the three months ended September 30, 1996 and 1995, respectively, a decrease
$0.1 million. The decrease in advertising revenues is attributable to a $0.5
million decrease in Mens' Magazines, offset by a $0.4 million increase in
Automotive Magazines. Subscription revenues were $2.8 million and $3.5 million
for the three months ended September 30, 1996 and 1995, respectively, a decrease
of $0.7 million. The decrease in subscription revenues is attributable to a $0.6
million decrease in revenues from Mens Magazines and a $0.1 million decrease in
revenues from Automotive magazines. Revenues for the Entertainment segment were
$3.8 million and $4.1 million for the three months ended September 30, 1996 and
1995, respectively, a decrease of $0.6 million. Revenues from the Company's
video business decreased $0.4 million, while the company's pay-per-call business
revenue decreased $0.1 million for the period. Revenues from the Company's
internet business was $0.2 million and $0.3 million for the three months ended
September 30, 1996 and 1995, respectively.
Income (loss) from operations was $2.2 million for the three months ended
September 30, 1996, compared to ($0.3) million for the three months ended
September 30, 1995. Income from operations was positively impacted by a decrease
in production, distribution and editorial costs resulting primarily from a
reduction in the number of magazine copies printed, as well as headcount
reductions and other spending efficiencies which reduced selling, general and
administrative costs in 1996.
Net non-operating expenses were $2.4 million for the three months ended
September 30, 1996 and 1995. Included in interest expense is the amortization of
debt issuance costs and discounts of $0.3 million for the three months ended
September 30, 1996 and 1995.
8
<PAGE>
Item 2. (Continued)
Net loss for the three months ended September 30, 1996 was ($0.2) million,
compared to ($2.1) million for the three months ended September 30, 1995, as a
result of the above discussed factors.
The net revenues and income (loss) from operations of the Company were as
follows:
Income (loss)
Net Revenue from operations
------------ ---------------
Three Three
Months Ended Months Ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------- ------- ------ ------
Publishing Segment $ 26.2 $ 24.0 $ (1.3) $ 1.2
Entertainment Segment 4.4 3.8 1.0 1.0
------- ------- ------ ------
$ 30.6 $ 27.8 $ (0.3) $ 2.2
======= ======= ====== ======
Publishing Segment
The net revenues and income (loss) from operations of the Publishing Segment
were as follows :
Income (loss)
Net Revenue from operations
------------ ---------------
Three Three
Months Ended Months Ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------- ------- ------ ------
Penthouse Magazine and
the Affiliate Publications $ 21.0 $ 18.4 $ (1.7) $ (0.0)
Foreign edition licensing 0.6 0.8 0.5 0.6
Automotive Magazines 4.6 4.8 (0.1) 0.6
------- ------- ------ ------
$ 26.2 $ 24.0 $ (1.3) $ 1.2
======= ======= ====== ======
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $18.4
million and $21.0 million for the three months ended September 30, 1996 and
1995, respectively, a decrease of $2.6 million. Newsstand revenue for the three
months ended September 30, 1996 was $12.2 million, compared to $13.9 million for
the three months ended September 30, 1995, a decrease of $1.7 million. The
decrease in newsstand revenue is primarily attributable to a decrease of 9% in
the number of newsstand copies sold of Penthouse magazine, as well as a decline
in the number of newsstand copies of the Affiliate publications during the three
months ended September 30, 1996, as compared to the 1995 period. The decline in
copies sold was partially offset by higher cover prices for the Affiliated
publications during the three months ended September 30, 1996, as compared to
the 1995 period. Advertising revenue was $3.9 million for the three months ended
September 30, 1996, compared to $4.5 million for the three months ended
September 30, 1995, an decrease of $0.6 million, primarily attributable to a
decrease in ad pages sold in Penthouse magazine and the Affiliate publications
during the three months ended September 30, 1996, as compared to three months
ended September 30 1995. This decrease is partially offset by an increase in the
rate per page in Penthouse and the Affiliate publications. Subscription revenue
was $1.9 million and $2.5 million for the three months ended
9
<PAGE>
Item 2.(Continued)
September 30, 1996 and 1995, respectively, a decrease of $0.6 million. This
decrease is due primarily to a decrease in copies sold associated with lower
subscription acquisition spending in 1996. Other revenue was $0.4 million for
the three months ended September 30, 1996, compared to $0.2 million for the
three months ended September 30, 1995, an increase of $0.2 million. The increase
in other revenues is primarily attributable to an increase in revenues received
from the sale of past issues of the Company's publications sold as value-packs,
due primarily to the timing of on sale dates.
Publishing-production, distribution and editorial expenses were $10.0 million
for the three months ended September 30, 1996, compared to $13.3 million for the
three months ended September 30, 1995, a decrease of $3.3 million. Paper costs
were $4.3 million for the three months ended September 30, 1996, compared to
$5.4 million for the three months ended September 30, 1995, a decrease of $1.1
million. Paper costs were reduced by reducing the number of copies printed and
by reducing the number of pages printed of certain publications . Additionally,
the cost of paper was lower during the three months ended September 30, 1996, as
compared to the 1995 period. Print costs were $3.6 million for the three months
ended September 30, 1996, compared to $4.6 million for the three months ended
September 30, 1995, a decrease of $1.0 million. The decrease is attributable to
the decreased number of copies printed and to the reduced number of pages
printed of certain publications. Additionally, the Company has reduced its
printing costs through production efficiencies implemented in the later part of
1995. Distribution costs were $1.5 million for the three months ended September
30, 1996, compared to $1.8 million for the three months ended September 30,
1995, a decrease of $0.3 million. The decrease is attributable to fewer copies
being distributed, offset by generally higher distribution costs. Editorial
costs were $0.8 million for the three months ended September 30, 1996, compared
to $1.3 million for the three months ended September 30, 1995, a decrease of
$0.5 million, due to decreased pictorial cost for Penthouse magazine, a decrease
in the amount of ongoing write-off of obsolete pictorial inventory and decreased
editorial costs of Penthouse Comix. During the three months ended September 30,
1996 the adjustment to the LIFO reserve resulted in decreased expense of $0.4
million, as compared to the 1995 period.
Selling, general and administrative expenses were $8.1 million for the three
months ended September 30, 1996, compared to $8.9 million for the three months
ended September 30, 1995, a decrease of $0.8 million. The decrease is primarily
attributable to lower salaries, employee benefits, travel and entertainment, and
other employment related expenses in 1996 as a result of corporate downsizing
($0.6 million) and lower rebates earned by newsstand retailers due to lower
newsstand sales($0.2 million).
Rent expense from affiliated companies represents charges from affiliated
companies for the use of the Company's executive offices. The charge is based
upon the Company's proportionate share of the operating expenses of such
offices. Rent expense from affiliated companies was $0.1 million for the three
months ended September 30, 1996, compared to $0.3 million for the three months
ended September 30, 1995, a decrease of $0.1 million, due to lower operating
costs incurred by the affiliated companies resulting in a lower rent charge.
Depreciation and amortization was $0.3 million and $0.2 million for the three
months ended September 30, 1996 and 1995, respectively.
10
<PAGE>
Item 2.(Continued)
Foreign Edition Licensing
Revenues from licensing of foreign editions were $0.8 million and $0.7 million
for the three months ended September 30, 1996 and 1995, respectively. Selling,
general and administrative expenses were $0.2 million for the three months ended
September 30, 1996 and 1995, respectively. Revenues can vary from period to
period based upon the timing of the completion of licencing agreements, as well
as the terms of the agreement.
Automotive Magazines
Revenues for the Automotive Magazines were $4.8 million for the three months
ended September 30, 1996, compared to revenues of $4.6 million for the three
months ended September 30, 1995, an increase of $0.2 million. Newsstand revenues
were $1.1 million and $1.2 million for the three months ended September 30, 1996
and 1995, respectively, a decrease of $0.1 million, due primarily to an
automotive special being published in 1995. Advertising revenues were $2.8
million for the three months ended September 30, 1996, compared to $2.4 million
for the three months ended September 30, 1995, an increase of $0.4 million,
resulting primarily from an increase in advertising page rates, partially offset
by a decrease in advertising pages sold and an automotive special being
published in 1995. Subscription revenues were $0.9 million and $1.0 million for
the period ended September 30, 1996 and 1995, respectively, a decrease of $0.1
million due to a decline in the number of subscription copies sold, resulting
from reduced subscription acquisition spending in 1996.
Publishing-production, distribution and editorial expenses were $2.5 million and
$2.8 million for the three months ended September 30, 1996 and 1995,
respectively, a decrease of $0.3 million. Paper costs were $1.1 million for the
three months ended September 30, 1996, compared to $1.2 million for the three
months ended September 30, 1995, a decrease of $0.1 million. The decrease in
paper costs is primarily attributable to a decreased number of magazine copies
printed and an automotive special being printed in 1995. Print costs were $0.9
million and $1.0 million for the three months ended September 30, 1996 and 1995,
a decrease of $0.2 million. The decrease is primarily attributable to fewer
magazine copies printed and an automotive special being printed in 1995.
Distribution costs were $0.5 million for the three months ended September 30,
1996 and September 30, 1995. Editorial costs were $0.1 million for the three
months ended September 30, 1996 and 1995.
Selling, general and administrative expenses were $1.5 million and $1.7 million
for the three months ended September 30, 1996 and 1995, respectively, a decrease
of $0.2 million. The decrease is primarily attributable to lower subscription
acquisition spending in 1996.
Depreciation and amortization was $0.1 million for the three months ended
September 30, 1996, compared to $0.2 million for the three months ended
September 30, 1995, a decrease of $0.1 million, as a result of certain
intangible assets becoming fully amortized in 1995.
11
<PAGE>
Item 2.(Continued)
Entertainment Segment
Revenues from the Entertainment Segment were $3.8 million for the three months
ended September 30, 1996, compared to $4.4 million for the three months ended
September 30, 1995, a decrease of $0.6 million. The Company's video division
revenue decreased $0.4 million and the pay-per-call division and Internet
business revenues each decreased $0.1 million. The Company's video division
revenue decrease is primarily due to fewer videocassettes sold through the
Company's national wholesale distributor during the three months ended September
30, 1996, as compared to the three months ended September 30, 1995. Pay-per-call
revenue decreased due to lower call volume associated with the discontinuance of
certain 900 numbers.
Direct costs were $2.0 million for the three months ended September 30, 1996,
compared to $2.2 million for the three months ended September 30, 1995, a
decrease of $0.2 million. The Company's video division experienced a $0.3
million decrease in direct expenses primarily associated with declines in
fulfillment and distribution costs associated with a lower sales volume. This
decrease is offset by a $0.1 million increase in direct expenses of the
pay-per-call division associated with increased carrier costs.
Selling, general and administrative expenses were $0.8 million for the three
months ended September 30, 1996 compared to $1.1 million for the three months
ended September 30, 1995, a decrease of $0.3 million. The decrease is primarily
attributable to lower consulting fees, as well as lower costs of the Company's
video business due to lower sales volume.
12
<PAGE>
Item 2.(continued)
Results of Operations (Nine Months Ended September 30, 1996 vs. 1995)
The Company's revenues were $85.7 million for the nine months ended September
30, 1996, compared to revenues of $90.5 million for the nine months ended
September 30, 1995, a decrease of $4.8 million. Newsstand revenues were $40.8
million and $45.2 million for the nine months ended September 30, 1996 and 1995,
respectively, a decrease of $4.4 million. The decrease is primarily attributable
to lower newsstand revenues from Men's magazines. Advertising revenues were
$20.9 million and $19.4 million for the nine months ended September 30, 1996 and
1995, respectively, an increase $1.5 million. The increase in advertising
revenues is attributable to a $0.4 million increase in Mens' Magazines and a
$1.1 million increase in Automotive Magazines. Subscription revenues were $8.8
million and $9.5 million for the nine months ended September 30, 1996 and 1995,
respectively, a decrease of $0.7 million. The decrease in subscription revenues
is attributable to a $0.6 million decrease in revenues from Mens Magazines and a
$0.1 million decrease in revenues from Automotive magazines. Revenues for the
Entertainment segment were $11.7 million and $13.5 million for the nine months
ended September 30, 1996 and 1995, respectively, a decrease of $1.8 million.
Revenues from the Company's video and pay-per-call businesses decreased $1.9
million and $0.4 million, respectively . Revenue from the Company's internet
business was $0.9 and $0.4 million for the nine months ended September 30, 1996
and 1995, respectively.
Income (loss) from operations was $5.2 million for the nine months ended
September 30, 1996, compared to ($0.9) million for the nine months ended
September 30, 1995. Income from operations was positively impacted by a decrease
in production, distribution and editorial costs resulting from a reduction in
the number of magazine copies printed, as well as headcount reductions and other
spending efficiencies which reduced selling, general and administrative costs in
1996. Additionally, costs of $0.5 million were incurred in the nine month period
ended September 30, 1995 related to the relocation of the Company's principal
corporate office.
Net non-operating expenses were $7.2 million for the nine months ended September
30, 1996, compared to $7.4 million for the nine months ended September 30, 1995,
a decrease of $0.2 million, as a result of the repurchase of $5.0 million of
Notes by the Company in July 1995. Included in interest expense is the
amortization of debt issuance costs and discounts of $0.9 million for the nine
months ended September 30, 1996 and 1995.
Net loss for the nine months ended September 30, 1996 was ($2.1) million,
compared to ($7.6) million for the nine months ended September 30, 1995, as a
result of the above discussed factors.
The net revenues and income (loss) from operations of the Company were as
follows:
Income (loss)
Net Revenue from operations
------------ ---------------
Nine Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------- ------- ------ ------
Publishing Segment $ 77.0 $ 74.0 $ (3.3) $ 2.5
Entertainment Segment 13.5 11.7 2.4 2.7
------- ------- ------ ------
$ 90.5 $ 85.7 $ (0.9) $ 5.2
======= ======= ====== ======
13
<PAGE>
Item 2.(Continued)
Publishing Segment
The net revenues and income (loss) from operations of the Publishing Segment
were as follows :
Income (loss)
Net Revenue from operations
------------ ---------------
Nine Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------- ------- ------ ------
Penthouse Magazine and
the Affiliate Publications $ 60.9 $ 56.8 $ (4.9) $ (1.1)
Foreign edition licensing 1.9 2.0 1.2 1.6
Automotive Magazines 14.2 15.1 0.4 2.0
------- ------- ------ ------
$ 77.0 $ 73.9 $ (3.3) $ 2.5
======= ======= ====== ======
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $56.8 and
$60.9 million for the nine months ended September 30, 1996 and 1995,
respectively. Newsstand revenue for the nine months ended September 30, 1996 was
$37.2 million, compared to $41.5 million for the nine months ended September 30,
1995, a decrease of $4.3 million. The decrease in newsstand revenues is
primarily attributable to a decrease of 11% and 18% in the number of newsstand
copies sold of Penthouse magazine and the Affiliate publications, respectively,
during the nine months ended September 30, 1996, as compared to the 1995 period.
The decline in copies sold was partially offset by higher cover prices for the
Company's magazines during the nine months ended September 30, 1996. The Company
increased the cover price of Penthouse magazine, beginning with the June 1995
issue. Accordingly, the Company now publishes annually, four issues of Penthouse
magazine at $6.99 per issue and eight issues at $5.99. Advertising revenue was
$12.1 million for the nine months ended September 30, 1996, compared to $11.7
million for the nine months ended September 30, 1995, an increase of $0.4
million, primarily attributable to an increase in advertising rates per page in
the Penthouse magazine and the Affiliate publications, partially offset by lower
number of advertising pages sold in both Penthouse magazine and the Affiliate
publications. Subscription revenue was $6.0 million and $6.6 million for the
nine months ended September 30, 1996 and 1995, respectively, a decrease of $0.6
million due primarily to a decline in the number of subscription copies sold,
due to lower subscription acquisition spending. Other revenue was $1.5 million
for the nine months ended September 30, 1996, compared to $1.0 million for the
nine months ended September 30, 1995, an increase of $0.5 million. The increase
is attributable to revenues received from the catalogue sales of merchandise,
book sales, and increased royalty income.
Publishing-production, distribution and editorial expenses were $31.5 million
for the nine months ended September 30, 1996, compared to $36.3 million for the
nine months ended September 30, 1995, a decrease of $4.8 million. Paper costs
were $13.2 million for the nine months ended September 30, 1996, compared to
$15.0 million for the nine months ended September 30, 1995, a decrease of $1.8
million. Paper costs were reduced by reducing the number of copies printed and
the number of pages printed of certain publications. However, these decreases
were partially offset by an increase in the price of paper during the first half
of 1996. Print costs were $10.7 million for the nine months ended September 30,
1996, compared to $12.9 million for the nine months ended September 30, 1995, a
decrease of $2.2 million. The decrease is attributable to decreases in the
number of copies printed and the number of pages printed of certain
publications, partially offset by higher printing costs. Distribution costs were
$4.5 million for the nine months ended September
14
<PAGE>
Item 2.(Continued)
30, 1996, compared to $4.8 million for the nine months ended September 30, 1995,
a decrease of $0.3 million. The decrease is attributable to a decrease in the
number of magazines distributed, offset by generally higher distribution costs.
Editorial costs were $2.7 million for the nine month period ended September 30,
1996, compared to $3.4 million for the period ended September 30, 1995, a
decrease of $0.7 million, due to less spending related to the 1996 anniversary
issue on Penthouse magazine as compared to the 1995 issue, a decrease in the
ongoing write-off of obsolete pictorial inventory and decreased editorial cost
of Penthouse Comix. Other production costs of $0.5 million were incurred during
the nine months ended September 30, 1996 related to an insert placed in certain
publications to promote the Company's pay-per-call services. During the nine
months ended September 30, 1996, the adjustment to the LIFO reserve resulted in
decreased expense of $0.4 million, as compared to the 1995 period.
Selling, general and administrative expenses were $25.0 million for the nine
months ended September 30, 1996, compared to $27.8 million for the nine months
ended September 30, 1995, a decrease of $2.8 million. The decrease is primarily
attributable to moving expenses incurred in 1995($0.5 million), lower
subscription fulfillment costs in 1996 related to the Company's change to a new
subscription fulfillment company ($0.1 million), lower salaries, employee
benefits, travel and entertainment, and temporary personnel expenses in 1996 as
a result of corporate downsizing ($2.0 million) and a decrease in legal fees
($0.4 million). These decreases were offset by increased occupancy expense of
$0.2 million related to the Company's new corporate office.
Rent expense from affiliated companies represents charges from affiliated
companies for the use of the Company's corporate and executive offices. The
charge is based upon the Company's proportionate share of the operating expenses
of such offices. Rent expense from affiliated companies was $0.6 million for the
nine months ended September 30, 1996, compared to $1.1 million for the nine
months ended September 30, 1995, a decrease of $0.5 million. The decrease is
partially because, effective March 1, 1995, in connection with the relocation of
the Company's principal corporate offices, rent expense for the Company's
corporate office is included in selling, general and administrative expense,
rather than in rent expense from affiliated companies, This change contributed
$0.3 million to this decrease.
Depreciation and amortization was $1.4 million for the nine months ended
September 30, 1996, compared to $1.2 million for the nine months ended September
30, 1995, an increase of $0.2 million, as a result of the amortization of
leasehold improvements incurred in connection with the relocation of the
Company's corporate offices in 1995.
Foreign Edition Licensing
Revenues from licensing of foreign editions were $2.0 and $1.9 million for the
nine months ended September 30, 1996 and 1995, respectively, an increase of $0.1
million. Selling, general and administrative expenses were $0.5 and $0.6 million
for the nine months ended September 30, 1996 and 1995, respectively, a decrease
of $0.1 million, resulting from lower legal costs incurred in 1996 associated
with a dispute with the licensee of the United Kingdom edition of Penthouse
magazine.
15
<PAGE>
Item 2.(Continued)
Automotive Magazines
Revenues for the Automotive Magazines were $15.1 million for the nine months
ended September 30, 1996, compared to revenues of $14.2 million for the nine
months ended September 30, 1995, an increase of $0.9 million. Newsstand revenues
were $3.6 million and 3.7 million for the nine months ended September 30, 1996
and 1995, respectively, a decrease of $0.1 million, due primarily to one less
automotive special being published in 1996. Advertising revenues were $8.7
million for the nine months ended September 30, 1996, compared to $7.6 million
for the nine months ended September 30, 1995, an increase of $1.1 million,
resulting from an increase in advertising page rates, partially offset by a
decrease in advertising pages sold. Subscription revenues were $2.8 million and
$2.9 million for the nine months ended September 30, 1996 and 1995,
respectively, a decrease of $0.1 million, due primarily to a decline in the
number of subscription copies sold.
Publishing-production, distribution and editorial expenses were $8.1 million for
the nine months ended September 30, 1996, compared to $8.2 million for the nine
months ended September 30, 1995, a decrease of $0.1 million. Paper costs were
$3.5 million for the nine months ended September 30, 1996, compared to $3.2
million for the nine months ended September 30, 1995, an increase of $0.3
million. The increase in paper costs is primarily attributable to increased
paper prices in the first half of 1996, partially offset by a lower number of
copies printed and one less automotive special being published in 1996. Print
costs were $2.9 million for the nine months ended September 30, 1996, compared
to $3.2 million for the nine months ended September 30, 1995, a decrease of $0.3
million related to a decrease in the number of copies printed, a decrease in the
number of pages per issue, as well as one less automotive special being
published in 1996. Distribution costs were $1.5 million for the nine months
ended September 30, 1996 and 1995. Editorial costs were $0.2 million for the
nine months ended September 30, 1996 and 1995.
Selling, general and administrative expenses were $4.6 million for the nine
months ended September 30, 1996, compared to $5.1 million for the nine months
ended September 30, 1995, a decrease of $0.5 million. The decrease is
attributable to lower subscription fulfillment costs resulting from the change
to a new fulfillment company and lower subscription acquisition spending in
1996.
Depreciation and amortization was $0.4 million for the nine months ended
September 30, 1996 compared to $0.6 million for the nine months ended September
30, 1995, a decrease of $0.2 million, as a result of certain intangible assets
becoming fully amortized in 1995.
Entertainment Segment
Revenues from the Entertainment Segment were $11.7 million for the nine months
ended September 30, 1996, compared to $13.5 million for the nine months ended
September 30, 1995, a decrease of $1.8 million. The Company's pay-per-call and
video divisions accounted for decreases of $0.4 million and $1.9 million,
respectively. These decreases are partially offset by $0.5 million in revenues
from the Company's internet business. The decrease in pay-per-call revenues is
attributed primarily to a required reduction in the extension of credit to
callers that did not meet certain criteria established by the Company, the
purpose of which was to reduce the amount of customer charge backs to a level
acceptable to credit card companies. The decrease in revenues from the Company's
video division is due primarily to fewer videocassettes sold through the
Company's national wholesale distributor during the nine months ended September
30, 1996, as compared to the nine months ended September 30, 1995. Furthermore,
more videocassettes related to the 25th anniversary issue of Penthouse magazine
were sold during the nine months ended September 30, 1995, as
16
<PAGE>
Item 2.(Continued)
compared to the nine months ended September 30, 1996. Internet revenues have
been achieved primarily through the implementation, in August 1995, of a pay
subscription service on the internet.
Direct costs were $6.0 million for the nine months ended September 30, 1996,
compared to $7.2 million for the nine months ended September 30, 1995, a
decrease of $1.2 million. The Company's video division experienced a $0.9
million decrease in direct costs primarily associated with declines in
fulfillment and distribution costs associated with a lower sales volume. The
Company's pay-per-call business experienced a $0.3 million reduction in costs
attributed to lower levels of customer charge backs due to the reduction in the
extension of credit to callers that did not meet certain criteria established by
the Company, as previously discussed.
Selling, general and administrative expenses were $3.0 million for the nine
months ended September 30, 1996 compared to $3.9 million for the nine months
ended September 30, 1995, a decrease of $0.9 million. The decrease in expenses
is primarily attributable to lower costs of the Company's video business
associated with lower sales volume, partially offset by expenses related to the
internet division.
Liquidity and Capital Resources
At September 30, 1996, the Company had $ 7.2 million in cash and cash
equivalents, compared to $4.4 million at December 31, 1995. The increase in cash
and cash equivalents during the nine months ended September 30, 1996 resulted
from net cash flows provided by operating activities of $4.8 million, partially
offset by net cash flows used in investing activities of $0.3, and net cash
flows used in financing activities of $1.6 million.
Cash flows from operating activities
Net cash provided by operating activities was $4.8 million for the nine months
ended September 30, 1996, compared to net cash used in operating activities of
$11.3 million for the nine months ended September 30, 1995. Net cash provided by
operating activities for the nine months ended September 30, 1996 was primarily
a result of lower paper inventory levels as the price of paper has begun to
decline in 1996, the decline of subscription acquisition costs due to lower
spending levels in 1996 and the net loss during the period. Net cash used in
operating activities for the nine months ended September 30, 1995 was primarily
a result of the net loss during that period, the reduction in the accounts
payable balance due to a major supplier and the increase in paper inventory due
to paper price increases.
Cash flows from investing activities
Cash used in investing activities for the nine months ended September 30, 1996
was $0.3 million, compared to cash used in investing activities of $4.3 million
for the nine months ended September 30, 1995. The 1995 amount was due primarily
to capital expenditures incurred in connection with the relocation of the
Company's corporate offices. The Company does not currently expect to make any
major capital expenditures over the next twelve months.
Cash flows from financing activities
Cash flows used in financing activities were $1.6 million for the nine months
ended September 30, 1996, compared to cash flows provided by financing
activities of $2.3 million for the nine months ended September 30, 1995.
Affiliated company investments and advances at September 30, 1996 increased $0.6
million from the December 31, 1995 balance, whereby the Company is owed $1.6
million from GMI as of September 30, 1996. These balances regularly result from
the impact of certain cost sharing and expense allocation agreements with GMI
and its subsidiaries, whereby certain costs, such as shared corporate salaries
and overhead, are paid by the Company and a portion charged to GMI and its
subsidiaries as incurred. These
17
<PAGE>
Item 2.(Continued)
charges generally result in amounts due to the Company, and are generally repaid
sixty days after the end of each quarter in accordance with the terms of an
expense sharing agreement. No reimbursements have been made by GMI in 1996.
Demand for such payment has been made in writing. Management of the Company
believes that GMI and its subsidiaries have sufficient assets to enable the
Company to recover its advance through liquidation of certain of those assets or
through the refinancing of GMI's debts. The principal shareholder of GMI has
guaranteed the entire amount due to the Company. GMI has agreed in writing to
repay the entire amount due from the proceeds of certain transactions which are
expected to be completed by December 31, 1996.
During the nine months ended September 30, 1995, the Company repurchased $5.0
million face amount of its outstanding senior secured notes, for $4.1 million.
Also during the none months ended September 30, 1995, the Company received a
$5.0 million recoupable advance from its distributor of videocassettes and
films. This advance, included in unearned revenue, will be recognized as revenue
over the term of the agreement, as videocassettes are sold. The Company will not
receive cash from the sale of videocassettes until this amount is recouped by
the Company's distributor.
The ability of the Company to incur additional debt is severely limited by the
terms of its Notes and the Indenture. Pursuant to the Indenture, the Company may
not declare a dividend on its common stock, subject to certain exceptions,
unless it meets certain financial covenants set forth therein. The Subsidiary
Guarantors under the Indenture, however, are permitted to make intercompany
dividends on their common stock.
Future outlook
The Company's cash balance at September 30, 1996 is $7.2 million. The Company
has a $4.2 million semiannual interest payment due on December 31, 1996.
In October, 1996, the Company entered into a settlement agreement in the United
Kingdom, whereby the Company received $1.5 million cash ($1.1 million net of
expenses) and a note receivable of $0.5 million, payable $25,000 per quarter,
plus interest. Management believes that the past due amounts due from GMI ($1.6
million) and the loan receivable from GMI's principal shareholder ($1.0
million), as of September 30, 1996, will be paid on or before December 31, 1996.
Accordingly, management believes that it will have sufficient cash resources
through these sources and through positive cash flows from operations to meet
its obligations over the next twelve months.
18
<PAGE>
Part II-Other Information
Item 1. Legal Proceedings
In May 1996, an action was brought by two celebrities against the Company
alleging the possession and intent to publish certain photographs in Penthouse
magazine. The amended complaint demands damages in an unspecified amount, an
injunction against the publication of the photographs and punitive damages. In
September 1996, the same celebrities brought another action against the Company,
claiming that an article published about them violated their privacy, and
demanded an injunction and unspecified damages. The Company believes that the
claim is without merit and has tendered defense of this action to its insurance
carrier. In the opinion of management, the outcome of this litigation will not
have a material adverse effect on the Company's financial position or results of
operations.
In August 1996, an action was brought against the Company alleging various
wrongs in connection with the Company's dealings with the former editor of
Penthouse Comix and Mens Adventure Comix. The complaint alleges RICO violations,
breach of contract, trademark and copyright infringement and other charges and
demands damages in excess of $20 million. The Company believes that the claim is
without merit and has tendered defense of this action to its insurance carrier.
In the opinion of management, the outcome of this litigation will not have a
material adverse effect on the Company's financial position or results of
operations.
Item 6. Exhibits and reports on Form 8-K
(a) The exhibits listed in the "Exhibit Index" are filed as part of this
report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
19
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
General Media, Inc.
(Registrant)
Dated: November 13, 1996 By: /s/ Patrick J. Gavin
----------------------------
Signature
Patrick J. Gavin
Executive Vice President-Operations,
Chief Financial Officer and Treasurer
(Duly Authorized Officer and
Principal Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL
MEDIA, INC'S SEPTEMBER 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,211
<SECURITIES> 0
<RECEIVABLES> 11,689
<ALLOWANCES> 0
<INVENTORY> 4,573
<CURRENT-ASSETS> 29,227
<PP&E> 4,961
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,227
<CURRENT-LIABILITIES> 32,860
<BONDS> 79,245
0
0
<COMMON> 5
<OTHER-SE> (74,141)
<TOTAL-LIABILITY-AND-EQUITY> 46,227
<SALES> 85,757
<TOTAL-REVENUES> 85,757
<CGS> 45,568
<TOTAL-COSTS> 34,464
<OTHER-EXPENSES> 558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,431
<INCOME-PRETAX> (2,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,076)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,076)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
