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 June 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 August 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 N/A
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 N/A
Signatures 18
Exhibit Index 19
2
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
General Media, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands)
Six months ended Three months ended
June 30, June 30,
-------- --------
1995 1996 1995 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues
Publishing
Newsstand $30,149 $27,495 $15,779 $14,276
Advertising 12,554 14,194 6,696 7,203
Subscription 5,997 5,942 3,014 3,011
Other 2,013 2,359 1,261 1,237
Entertainment 9,158 7,937 4,641 4,173
-------------- -------------- -------------- -------------
59,871 57,927 31,391 29,900
-------------- -------------- -------------- -------------
Operating costs and expenses
Publishing-production, distribution and editorial 28,448 27,096 14,683 13,851
Entertainment-direct costs 4,972 3,990 2,427 2,160
Selling, general and administrative 25,593 22,518 13,326 11,224
Rent expense from affiliated companies 696 422 292 202
Depreciation and amortization 783 937 444 497
-------------- -------------- -------------- -------------
Total operating costs and expenses 60,492 54,963 31,172 27,934
-------------- -------------- -------------- -------------
Income (loss) from operations (621) 2,964 219 1,966
-------------- -------------- -------------- -------------
Other income (expense)
Interest expense (5,316) (4,953) (2,630) (2,477)
Interest income 392 135 215 80
-------------- -------------- -------------- -------------
NET INCOME (LOSS) ($5,545) ($1,854) ($2,196) ($431)
============== ============== ============== =============
</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, June 30,
1995 1996
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,380 $3,023
Accounts receivable, net of allowance
for doubtful accounts 13,089 14,167
Inventories 7,847 5,534
Prepaid expenses and other current assets 3,443 3,328
Due from affiliated companies 973 1,734
------------- -------------
Total current assets 29,732 27,786
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 5,592 5,241
OTHER ASSETS
Intangible assets, net 4,427 4,119
Deferred subscription aquisition costs 2,341 1,627
Deferred debt issuance costs, net 4,967 4,472
Loan to affiliated company 1,086 1,086
Other 1,362 1,318
------------- -------------
14,183 12,622
------------- -------------
$49,507 $45,649
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $12,869 $12,159
Deferred subscription revenue 14,179 12,554
Other liabilities and accrued expenses 6,226 6,988
------------- -------------
Total current liabilities 33,274 31,701
SENIOR SECURED NOTES 79,112 79,201
UNEARNED REVENUE 7,390 6,870
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) (75,337)
------------- -------------
(72,060) (73,914)
------------- -------------
$49,507 $45,649
============= =============
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)
Six months ended
June 30,
1995 1996
------------- -------------
Cash flows from operating activities
Net loss ($5,545) ($1,854)
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 783 937
Amortization of debt issuance costs
and discounts 621 584
Net change in operating assets
and liabilities (7,559) 15
------------- -------------
Net cash used in operations (11,700) (318)
------------- -------------
Cash flows from investing activities
Capital expenditures (3,939) (278)
Payments from affiliated company 269
------------- -------------
Net cash used in investing
activities (3,670) (278)
------------- -------------
Cash flows from financing activities
Advances to affiliated companies (1,469) (761)
Repayment of advances to affiliated
companies 897
Unearned revenues received 5,000
------------- -------------
Net cash provided by (used in)
financing activities 4,428 (761)
------------- -------------
Net decrease in cash and
cash equivalents (10,942) (1,357)
Cash and cash equivalents
at beginning of period 19,203 4,380
------------- -------------
Cash and cash equivalents
at end of period $8,261 $3,023
============= =============
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, June 30,
1995 1996
------------ --------
Paper and printing $ 4,792 $ 3,366
Editorials and pictorial 1,785 1,745
Film and programming costs 2,483 1,754
------- -------
9,060 6,865
Less- LIFO allowance-paper and printing 1,213 1,331
------- -------
$ 7,847 $ 5,534
======= =======
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) of ($75.2) 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 June 30, 1996, the Company was in compliance with all such
covenants.
Should the Company incur losses in the future, such that the Company's net worth
(deficiency) declines below ($75.2) 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 six months ended June 30, 1996 and
1995 were $4,370,000 and $4,635,000, 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, videocassettes,
pay-per-view programming, CD-ROM interactive products and internet services.
Results of Operations (Three Months Ended June 30, 1996 vs. 1995)
The Company's revenues were $29.9 million for the three months ended June 30,
1996, compared to revenues of $31.4 million for the three months ended June 30,
1995, a decrease of $1.5 million. Newsstand revenues were $14.3 million and
$15.8 million for the three months ended June 30, 1996 and 1995, respectively, a
decrease of $1.5 million. Newsstand revenues for Mens Magazines were $13.2 and
$14.6 million for the three months ended June 30, 1996 and 1995, respectively, a
decrease of $1.5 million. Newsstand revenues from the Automotive magazines were
$1.1 million for the three months ended June 30, 1996 and 1995. Advertising
revenues were $7.2 million and $6.7 million for the three months ended June 30,
1996 and 1995, respectively, an increase $0.5 million. The increase in
advertising revenues is attributable to a $0.2 million increase in Mens'
Magazines and a $0.3 million increase in Automotive Magazines. Subscription
revenues were $3.0 million for the three months ended June 30, 1996 and 1995.
Revenues for the Entertainment segment were $4.2 million and $4.7 million for
the three months ended June 30, 1996 and 1995, respectively, a decrease of $0.5
million. Revenues from the Company's video business decreased $0.9 million,
while the company's pay-per-call business revenue increased $0.1 million for the
period. Revenues from the Company's internet business was $0.3 million for the
three months ended June 30, 1996.
Income from operations was $2.0 million for the three months ended June 30,
1996, compared to $0.2 million for the three months ended June 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.
Net non-operating expenses were $2.4 million for the three months ended June 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 June 30, 1996 and
1995.
8
<PAGE>
Item 2. (Continued)
Net loss for the three months ended June 30, 1996 was ($0.4) million, compared
to ($2.2) million for the three months ended June 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
June 30, June 30,
-------- --------
1995 1996 1995 1996
---- ---- ---- ----
Publishing Segment $26.7 $25.7 $(0.2) $1.1
Entertainment Segment 4.7 4.2 0.4 0.9
----- ----- ---- ----
$31.4 $29.9 $0.2 $2.0
===== ===== ==== ====
Publishing Segment
The net revenues and income (loss) from operations of the Publishing Segment
were as follows :
Income (loss)
Net Revenues from operations
------------ ---------------
Three Three
Months Ended Months Ended
June 30, June 30,
-------- --------
1995 1996 1995 1996
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $21.4 $20.0 $(0.8) $(0.2)
Foreign edition licensing 0.6 0.7 0.3 0.6
Automotive Magazines 4.7 5.0 0.3 0.7
----- ----- ----- ----
$26.7 $25.7 $(0.2) $1.1
===== ===== ===== ====
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $20.0
million and $21.4 million for the three months ended June 30, 1996 and 1995,
respectively, a decrease of $1.4 million. Newsstand revenue for the three months
ended June 30, 1996 was $13.1 million, compared to $14.6 million for the three
months ended June 30, 1995, a decrease of $1.5 million. The decrease in
newsstand revenue is primarily attributable to a decrease of 10% in the number
of newsstand copies sold of both Penthouse magazine and the Affiliate
publications during the three months ended June 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 three months ended June 30, 1996,
as compared to the 1995 period. 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 $4.2 million for the three months
ended June 30, 1996, compared to $4.0 million for the three months ended June
30, 1995, an increase of $0.2 million, primarily attributable to an increase in
the rate per page in Penthouse magazine and the Affiliate publications.
Subscription revenue was $2.1 million for the three months ended June 30, 1996
and 1995. Other revenue was $0.5 million for the three months ended June 30,
1996,
9
<PAGE>
Item 2. (Continued)
compared to $0.6 million for the three months ended June 30, 1995, a decrease of
$0.1 million. The decrease in other revenues is attributable to a decrease 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 $11.2 million
for the three months ended June 30, 1996, compared to $12.0 million for the
three months ended June 30, 1995, a decrease of $0.8 million. Paper costs were
$4.5 million for the three months ended June 30, 1996, compared to $5.1 million
for the three months ended June 30, 1995, a decrease of $0.6 million. Paper
costs were reduced primarily by reducing the number of copies printed, and
secondarily by reducing the number of pages printed of certain publications and
the decreased frequency of Penthouse Comix. However, these decreases were
partially offset by an increase in the price of paper. Print costs were $3.5
million for the three months ended June 30, 1996, compared to $4.1 million for
the three months ended June 30, 1995, a decrease of $0.6 million. The decrease
is primarily attributable to the decreased number of copies printed and
secondarily to the reduced number of pages printed of certain publications, as
well as the decreased frequency of Penthouse Comix. These cost reductions were
partially offset by increases in costs of the production process. Distribution
costs were $1.4 million for the three months ended June 30, 1996, compared to
$1.5 million for the three months ended June 30, 1995, a decrease of $0.1
million. The decrease is attributable to fewer copies being distributed, offset
by generally higher distribution costs. Editorial costs were $0.9 million for
the three months ended June 30, 1996, compared to $1.3 million for the three
months ended June 30, 1995, a decrease of $0.4 million, due to a decrease in the
write-off of obsolete inventory of Penthouse magazine and decreased spending
levels in Penthouse Comix, offset by an increase caused by a change in the
editorial content of Forum magazine. During the three months ended June 30, 1996
the adjustment to the LIFO reserve resulted in increased expense of $0.4
million, as compared to the 1995 period. Other production costs of $0.4 million
were incurred during the three months ended June 30, 1996 for inserts placed in
certain publications to promote the Company's pay-per-call services.
Selling, general and administrative expenses were $8.5 million for the three
months ended June 30, 1996, compared to $9.6 million for the three months ended
June 30, 1995, a decrease of $1.1 million. The decrease is primarily
attributable to lower salaries, employee benefits, travel and entertainment, and
temporary personnel expenses in 1996 as a result of corporate downsizing ($1.0
million), and a decrease in outside advertising expenditures ($0.1 million).
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 $0.2 million for the
three months ended June 30, 1996, compared to $0.3 million for the three months
ended June 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 for the three months ended June
30, 1996 and 1995.
Foreign Edition Licensing
Revenues from licensing of foreign editions were $0.7 million and $0.6 million
for the three months ended June 30, 1996 and 1995, respectively. Selling,
general and administrative expenses were $0.1 million and $0.3 million for the
three months ended June 30, 1996 and 1995, respectively. The decrease in
expenses is a result of lower legal expenses incurred during the three months
ended June 30, 1996 .
10
<PAGE>
Item 2. (Continued)
Automotive Magazines
Revenues for the Automotive Magazines were $5.0 million for the three months
ended June 30, 1996, compared to revenues of $4.7 million for the three months
ended June 30, 1995, an increase of $0.3 million. Newsstand revenues were $1.1
million for the three months ended June 30, 1996 and 1995. Advertising revenues
were $3.0 million for the three months ended June 30, 1996, compared to $2.7
million for the three months ended June 30, 1995, an increase of $0.3 million,
resulting primarily from an increase in advertising page rates, partially offset
by a decrease in advertising pages sold. Subscription revenues remained constant
between each period at $0.9 million.
Publishing-production, distribution and editorial expenses were $2.6 million for
the three months ended June 30, 1996 and 1995. Paper costs were $1.3 million for
the three months ended June 30, 1996, compared to $1.0 million for the three
months ended June 30, 1995, an increase of $0.3 million. The increase in paper
costs is primarily attributable to the increased price of paper, partially
offset by a lower number of copies printed. Print costs were $1.1 million for
the three months ended June 30, 1996 and 1995. Distribution costs were $0.5
million for the three months ended June 30, 1996, compared to $0.4 million for
the three months ended June 30, 1995, an increase of $0.1 million due to
generally higher distribution costs.
Selling, general and administrative expenses were $1.5 million and $1.6 million
for the three months ended June 30, 1996 and 1995, respectively, a decrease of
$0.1 million. The decrease is primarily attributable to lower subscription
fulfillment costs associated with a new fulfillment company and lower direct
mail costs incurred during the period.
Depreciation and amortization was $0.1 million for the three months ended June
30, 1996, compared to $0.2 million for the three months ended June 30, 1995, a
decrease of $0.1 million, as a result of certain intangible assets becoming
fully amortized in 1995.
Entertainment Segment
Revenues from the Entertainment Segment were $4.2 million for the three months
ended June 30, 1996, compared to $4.7 million for the three months ended June
30, 1995, a decrease of $0.5 million. The Company's pay-per-call division
revenues increased $0.1 million, while the video division revenue decreased of
$0.8 million. This net decrease is offset by $0.3 million in revenues from the
Company's internet business. 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 June 30, 1996, as compared
to the three months ended June 30, 1995. Furthermore, fewer videocassettes
related to the 25th anniversary issue of Penthouse magazine were sold during the
three months ended June 30, 1996, as compared to the three months ended June 30,
1995. Internet revenues have been achieved primarily through the implementation,
in August 1995, of a pay subscription service on the internet.
Direct costs were $2.2 million for the three months ended June 30, 1996,
compared to $2.4 million for the three months ended June 30, 1995, a decrease of
$0.2 million. The Company's video division experienced a $0.2 million decrease
in direct expenses primarily associated with declines in fulfillment and
distribution costs associated with a lower sales volume.
Selling, general and administrative expenses were $1.1 million for the three
months ended June 30, 1996 compared to $1.8 million for the three months ended
June 30, 1995, a decrease of $0.7 million. The decrease
11
<PAGE>
Item 2. (Continued)
is attributable to lower costs of the Company's video business due primarily to
lower sales volume and is partially offset by costs associated with the
Company's internet business.
Results of Operations (Six Months Ended June 30, 1996 vs. 1995)
The Company's revenues were $57.9 million for the six months ended June 30,
1996, compared to revenues of $59.9 million for the six months ended June 30,
1995, a decrease of $2.0 million. Newsstand revenues were $27.5 million and
$30.1 million for the six months ended June 30, 1996 and 1995, respectively, a
decrease of $2.6 million. The decrease is attributable to lower newsstand
revenues from Men's magazines. Advertising revenues were $14.2 million and $12.6
million for the six months ended June 30, 1996 and 1995, respectively, an
increase $1.6 million. The increase in advertising revenues is attributable to a
$0.9 million increase in Mens' Magazines and a $0.7 million increase in
Automotive Magazines. Subscription revenues were $6.0 million for the six months
ended June 30, 1996 and 1995. Revenues for the Entertainment segment were $7.9
million and $9.2 million for the six months ended June 30, 1996 and 1995,
respectively, a decrease of $1.2 million. Revenues from the Company's video and
pay-per-call businesses decreased $1.5 million and $0.3 million, respectively .
Revenues from the Company's internet business was $0.6 and $0.1 million for the
six months ended June 30, 1996 and 1995, respectively.
Income (loss) from operations was $3.0 million for the six months ended June 30,
1996, compared to ($0.6) million for the six months ended June 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 $0.4 million were incurred in the six month period ended
June 30, 1995 related to the relocation of the Company's principal corporate
office.
Net non-operating expenses were $4.8 million for the six months ended June 30,
1996, compared to $4.9 million for the six months ended June 30, 1995, a
decrease of $0.1 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 $0.6 million for the six months ended June
30, 1996 and 1995.
Net loss for the six months ended June 30, 1996 was ($1.9) million, compared to
($5.5) million for the six months ended June 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
----------- ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1995 1996 1995 1996
---- ---- ---- ----
Publishing Segment $50.7 $50.0 $(2.0) $1.3
Entertainment Segment 9.2 7.9 1.4 1.7
----- ----- ----- ----
$59.9 $57.9 $(0.6) $3.0
===== ===== ===== ====
12
<PAGE>
Item 2. (Continued)
Publishing Segment
The net revenues and income (loss) from operations of the Publishing Segment
were as follows :
Income (loss)
Net Revenues from operations
------------ ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1995 1996 1995 1996
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $39.8 $38.4 $(3.3) $(1.0)
Foreign edition licensing 1.2 1.3 0.8 1.0
Automotive Magazines 9.7 10.3 0.5 1.3
----- ----- ----- ----
$50.7 $50.0 $(2.0) $1.3
===== ===== ===== ====
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $38.4 and
$39.8 million for the six months ended June 30, 1996 and 1995, respectively.
Newsstand revenue for the six months ended June 30, 1996 was $25.0 million,
compared to $27.6 million for the six months ended June 30, 1995, a decrease of
$2.6 million. The decrease in newsstand revenues is primarily attributable to a
decrease of 11% and 17% in the number of newsstand copies sold of Penthouse
magazine and the Affiliate publications, respectively, during the six months
ended June 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 six months ended June 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 $8.3 million for the six months
ended June 30, 1996, compared to $7.3 million for the six months ended June 30,
1995, an increase of $1.0 million, primarily attributable to an increase in
advertising pages sold in the Affiliate publications and an increase in the rate
per page in Penthouse magazine. Subscription revenue was $4.1 million for the
six months ended June 30, 1996 and 1995. Other revenue was $1.0 million for the
three months ended June 30, 1996, compared to $0.7 million for the six months
ended June 30, 1995, an increase of $0.3 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 $21.5 million
for the six months ended June 30, 1996, compared to $23.1 million for the six
months ended June 30, 1995, a decrease of $1.6 million. Paper costs were $8.9
million for the six months ended June 30, 1996, compared to $9.6 million for the
six months ended June 30, 1995, a decrease of $0.7 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 offset by an increase in
the price of paper. Print costs were $7.1 million for the six months ended June
30, 1996, compared to $8.3 million for the six months ended June 30, 1995, a
decrease of $1.2 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 increases in costs of the production process.
Distribution costs were $2.9 million for the six months ended June 30, 1996,
compared to $3.0 million for the six months ended June 30, 1995, a decrease of
$0.1 million. The decrease is attributable to a decrease in the number of
magazines
13
<PAGE>
Item 2. (Continued)
distributed, offset by generally higher distribution costs. Editorial costs were
$1.9 million for the six month period ended June 30, 1996, compared to $2.1
million for the period ended June 30, 1995, a decrease of $0.2 million, due to a
decrease in the write-off of obsolete inventory of Penthouse magazine and
decreased spending levels in Penthouse Comix, offset by increases due to a
change in the editorial content of Forum magazine. Other production costs of
$0.5 million were incurred during the six months ended June 30, 1996 related to
an insert placed in certain publications to promote the Company's pay-per-call
services.
Selling, general and administrative expenses were $16.9 million for the six
months ended June 30, 1996, compared to $18.9 million for the six months ended
June 30, 1995, a decrease of $2.0 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 ($1.3 million) and a decrease in legal fees
($0.3 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 $0.4 million for the
six months ended June 30, 1996, compared to $0.7 million for the six months
ended June 30, 1995, a decrease of $0.3 million, 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.
Depreciation and amortization was $0.6 million for the six months ended June 30,
1996, compared to $0.3 million for the six months ended June 30, 1995, an
increase of $0.3 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 $1.3 and $1.2 million for the
six months ended June 30, 1996 and 1995, respectively, a decrease of $0.1
million. Selling, general and administrative expenses were $0.3 and $0.5 million
for the six months ended June 30, 1996 and 1995, respectively, a decrease of
$0.2 million, resulting from lower legal costs incurred in 1996 associated with
a dispute with the licensee of the United Kingdom edition of Penthouse magazine.
Automotive Magazines
Revenues for the Automotive Magazines were $10.3 million for the six months
ended June 30, 1996, compared to revenues of $9.7 million for the six months
ended June 30, 1995, an increase of $0.6 million. Newsstand revenues were $2.5
million for the six months ended June 30, 1996 and 1995. Advertising revenues
were $5.9 million for the six months ended June 30, 1996, compared to $5.3
million for the six months ended June 30, 1995, an increase of $0.6 million,
resulting from an increase in advertising page rates, partially offset by a
decrease in advertising pages sold. Subscription revenues remained constant
between each period at $1.9 million.
14
<PAGE>
Item 2. (Continued)
Publishing-production, distribution and editorial expenses were $5.6 million for
the six months ended June 30, 1996, compared to $5.4 million for the six months
ended June 30, 1995, an increase of $0.2 million. Paper costs were $2.4 million
for the six months ended June 30, 1996, compared to $2.1 million for the six
months ended June 30, 1995, an increase of $0.3 million. The increase in paper
costs is primarily attributable to increased paper prices, partially offset by a
lower number of copies printed. Print costs were $2.0 million for the six months
ended June 30, 1996, compared to $2.1 million for the six months ended June 30,
1995, a decrease of $0.1 million related to a decrease in the number of copies
printed as well as a decrease in the number of pages per issue. Distribution
costs were $1.0 million for the six months ended June 30, 1996 and 1995.
Editorial costs were $0.2 million for the six months ended June 30, 1996 and
1995.
Selling, general and administrative expenses were $3.1 million for the six
months ended June 30, 1996, compared to $3.4 million for the six months ended
June 30, 1995, a decrease of $0.3 million. The decrease is primarily
attributable to the change to a new fulfillment company and lower subscription
direct mail costs.
Depreciation and amortization was $0.3 million for the six months ended June 30,
1996 compared to $0.4 million for the six months ended June 30, 1995, a decrease
of $0.1 million, as a result of certain intangible assets becoming fully
amortized in 1995.
Entertainment Segment
Revenues from the Entertainment Segment were $7.9 million for the six months
ended June 30, 1996, compared to $9.2 million for the six months ended June 30,
1995, a decrease of $1.3 million. The Company's pay-per-call and video divisions
accounted for decreases of $0.3 million and $1.5 million, respectively. These
decreases are partially offset by $0.6 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 six months ended June 30, 1996, as compared to the six
months ended June 30, 1995. Furthermore, fewer videocassettes related to the
25th anniversary issue of Penthouse magazine were sold during the six months
ended June 30, 1996, as compared to the six months June 30, 1995. Internet
revenues have been achieved primarily through the implementation, in August
1995, of a pay subscription service on the internet.
Direct costs were $4.0 million for the six months ended June 30, 1996, compared
to $5.0 million for the six months ended June 30, 1995, a decrease of $1.0
million. The Company's video division experienced a $0.6 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 $0.4 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 $2.2 million for the six
months ended June 30, 1996 compared to $2.7 million for the six months ended
June 30, 1995, a decrease of $0.5 million. The decrease in expenses is primarily
attributable to lower costs of the Company's video business associated with
lower sales volume, offset by expenses related to the internet division.
15
<PAGE>
Item 2. (Continued)
Liquidity and Capital Resources
At June 30, 1996, the Company had $ 3.0 million in cash and cash equivalents,
compared to $4.4 million at December 31, 1995. The decrease in cash and cash
equivalents during the six months ended June 30, 1996 resulted from net cash
flows used by operating activities of $0.3 million, net cash flows used in
investing activities of $0.3, and net cash flows used in financing activities of
$0.8 million.
Cash flows from operating activities
Net cash used in operating activities was $0.3 million for the six months ended
June 30, 1996, compared to net cash used in operating activities of $11.7
million for the six months ended June 30, 1995. Net cash used in operating
activities for the six months ended June 30, 1996 was primarily a result of the
net loss during the period. Net cash used in operating activities for the six
months ended June 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 six months ended June 30, 1996 was
$0.3 million, compared to cash used in investing activities of $3.7 million for
the six months ended June 30, 1995. The 1995 amount was due primarily to capital
expenditures incurred in connection with the relocation of the Company's
corporate offices.
Cash flows from financing activities
Cash flows used in financing activities were $0.8 million for the six months
ended June 30, 1996, compared to cash flows provided by financing activities of
$4.4 million for the six months ended June 30, 1995. Affiliated company
investments and advances at June 30, 1996 increased $0.8 million from the
December 31, 1995 balance, whereby the Company is owed $1.7 million from GMI as
of June 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 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. The reimbursement by GMI, due on May 31, 1996, in
the amount of $1.4 million, has not been made by August 13, 1996. Demand for
such payment has been made in writing. The additional amount due from GMI, in
the amount of $0.3 million, is not expected to be received from GMI by its due
date of August 31, 1996. 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 pending transactions. During the six months ended
June 30, 1995, the Company received a $5.0 million recoupable advance from its
distributor of videocassettes and films. This advance, included in unearned
revenue at June 30, 1996, 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
Due primarily to losses incurred by the Company in 1995 and during the six
months ended June 30, 1996, as well as other factors described in "Liquidity and
Capital Resources", the Company's cash balance at June 30, 1996 was reduced to
$3.0 million, from $4.4 million at December 31, 1995. The Company is obligated
to make a $4.2 million interest payment on its Notes on December 31, 1996.
The Company has been recently adversely impacted by significant paper price
increases (which have recently begun to moderate) and could be further adversely
impacted should the price of paper increase in the future. Additionally, the
Company's recent results from operations have been negatively impacted by
decreased newsstand circulation from Mens Magazines. Management has recently
taken steps to reduce costs, by reducing book size, changing paper grades and
reducing employee headcount, and the Company has taken steps to increase
revenues through
16
<PAGE>
Item 2. (Continued)
cover price increases and other revenue enhancements. These measures together
have enabled the Company to achieve improved income from operations of $3.0
million during the six months ended June 30, 1996, compared to a net loss of
$0.6 million during the six months ended June 30, 1995. The Company nevertheless
has incurred a net loss of $1.9 million during the six months ended June 30,
1996.
The Company's ability to meet its obligations on December 31, 1996 and beyond,
and therefore continue as a going concern in the future, is dependent upon its
ability to return to profitable operations. Due to the difficulty in predicting
future newsstand sales of the Company's magazines, no assurances can be given
that the Company can achieve profitable results of operations for the second
half of 1996.
Should the Company incur additional losses in the future, such that the
Company's net worth (deficiency) declines below ($75.2) 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.
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 June 30, 1996.
17
<PAGE>
Part II-Other Information
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: August 14, 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)
18
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule
19
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL
MEDIA, INC'S JUNE 30, 1996 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,023
<SECURITIES>
<RECEIVABLES> 14,167
<ALLOWANCES> 0
<INVENTORY> 5,534
<CURRENT-ASSETS> 27,786
<PP&E> 5,241
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,649
<CURRENT-LIABILITIES> 31,701
<BONDS> 79,201
0
0
<COMMON> 5
<OTHER-SE> (73,919)
<TOTAL-LIABILITY-AND-EQUITY> 45,649
<SALES> 57,927
<TOTAL-REVENUES> 57,927
<CGS> 31,086
<TOTAL-COSTS> 23,455
<OTHER-EXPENSES> 422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,953
<INCOME-PRETAX> (1,854)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,854)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
