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, 1997 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 14, 1997
----- ------------------------------
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
Signature 20
Exhibit Index 21
2
<PAGE>
General Media, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended Three months
June 30, June 30,
-------- --------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues
Publishing
Newsstand $27,495 $23,224 $14,276 $12,128
Advertising 14,194 12,948 7,203 6,587
Subscription 5,942 5,508 3,011 2,774
Other 2,359 2,002 1,237 1,021
Entertainment 7,937 6,725 4,173 3,801
------- ------- ------- -------
57,927 50,407 29,900 26,311
------- ------- ------- -------
Operating costs and expenses
Publishing-production, distribution and editorial 27,096 23,218 13,851 12,014
Entertainment- direct costs 3,990 3,292 2,160 1,643
Selling, general and administrative 22,518 20,743 11,224 10,870
Rent expense from affiliated companies 422 247 202 123
Depreciation and amortization 937 934 497 473
------- ------- ------- -------
Total operating costs and expenses 54,963 48,434 27,934 25,123
------- ------- ------- -------
Income from operations 2,964 1,973 1,966 1,188
------- ------- ------- -------
Other income (expense)
Interest expense (4,953) (4,954) (2,477) (2,477)
Interest income 135 310 80 182
------- ------- ------- -------
NET LOSS (1,854) (2,671) (431) (1,107)
======= ======= ======= =======
</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,
1996 1997
------------ --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $7,164 $5,927
Accounts receivable, net of allowance
for doubtful accounts 11,751 14,385
Inventories 5,250 4,362
Prepaid expenses and other current assets 2,692 2,776
Due from affiliated companies 624 867
------- -------
Total current assets 27,481 28,317
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 4,716 4,227
OTHER ASSETS
Intangible assets, net 3,810 3,502
Deferred subscription aquisition costs 2,162 2,581
Deferred debt issuance costs, net 3,977 3,482
Loan to affiliated company 1,086 1,086
Other 1,654 1,584
------- -------
12,689 12,235
------- -------
$44,886 $44,779
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $13,918 $14,978
Deferred subscription revenue 10,914 12,810
Other liabilities and accrued expenses 5,402 5,621
------- -------
Total current liabilities 30,234 33,409
SENIOR SECURED NOTES 79,290 79,379
UNEARNED REVENUE 6,160 5,460
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 (74,012) (76,683)
------- -------
(72,589) (75,260)
------- -------
$44,886 $44,779
======= =======
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,
--------
1996 1997
------- -------
Cash flows from operating activities
Net loss ($1,854) ($2,671)
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 937 934
Amortization of debt issuance costs and discounts 584 584
Net change in operating assets and liabilities 15 295
------- -------
Net cash used in operations (318) (858)
------- -------
Cash flows from investing activities
Capital expenditures (278) (136)
------- -------
Net cash used in investing activities (278) (136)
------- -------
Cash flows from financing activities
Advances to affiliated companies (761) (243)
------- -------
Net cash used in financing activities (761) (243)
------- -------
Net decrease in cash and cash equivalents (1,357) (1,237)
Cash and cash equivalents at beginning of period 4,380 7,164
------- -------
Cash and cash equivalents at end of period $3,023 $5,927
======= =======
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, 1996 has been derived from the audited
financial statements at that date.
2. Inventories
Inventories consist of the following:
December 31, June 30,
1996 1997
------------ --------
Paper and printing $ 2,581 $ 2,135
Editorials and pictorial 2,288 2,214
Film and programming costs 1,094 963
----- -----
5,963 5,312
Less- LIFO allowance-paper and printing 713 950
------ ------
$ 5,250 $ 4,362
======= =======
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 make an offer to
purchase outstanding notes if it fails to maintain a consolidated tangible net
worth (deficiency) of no more than ($81.6) million for two consecutive fiscal
quarters, and (iii) limits 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, 1997, the Company was in compliance with all such
covenants.
Should the Company continue to incur losses, such that the Company's net worth
(deficiency) declines below ($81.6) 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, 1997 and
1996 were $4.4 million in each such period.
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" and, together with Penthouse magazine, the "Mens
Magazines"), 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 "Automotive
Magazines"). 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, CDROM interactive products and
internet services.
Results of Operations (Three Months Ended June 30, 1997 vs. 1996)
The Company's revenues were $26.3 million for the three months ended June 30,
1997, compared to revenues of $29.9 million for the three months ended June 30,
1996, a decrease of $3.6 million. Newsstand revenues were $12.1 million and
$14.3 million for the three months ended June 30, 1997 and 1996, respectively, a
decrease of $2.2 million. Newsstand revenues for Mens' Magazines were $10.8 and
$13.2 million for the three months ended June 30, 1997 and 1996, respectively, a
decrease of $2.4 million. Newsstand revenues from the Automotive Magazines were
$1.3 million and $1.1 million for the three months ended June 30, 1997 and 1996,
respectively, an increase of $0.2 million. Advertising revenues were $6.6
million and $7.2 million for the three months ended June 30, 1997 and 1996,
respectively, a decrease $0.6 million. The decrease in advertising revenues is
attributable to a $1.0 million decrease in Mens' Magazines, partially offset by
a $0.4 million increase in Automotive Magazines. Subscription revenues were $2.8
million and $3.0 million for the three months ended June 30, 1997 and 1996,
respectively, a decrease of $0.2 million. The decrease in subscription revenues
is attributable to a $0.2 million decrease in revenues from Mens' Magazines.
Revenues for the Entertainment segment were $3.8 million and $4.2 million for
the three months ended June 30, 1997 and 1996, respectively, a decrease of $0.4
million. Revenues from the Company's video business increased $0.3 million,
revenues from the Company's pay-per-call business decreased $1.0 million and
revenues from the Company's internet business increased $0.3 million during the
three months ended June 30, 1997, as compared to the three month period ended
June 30, 1996.
Income from operations was $1.2 million for the three months ended June 30,
1997, compared to $2.0 million for the three months ended June 30, 1996. Income
from operations was negatively impacted by decreased revenues, as discussed
above, which was partially offset by a decrease in production, distribution and
editorial costs resulting from a reduction in the number of magazine copies
printed and lower paper costs, as well as lower
8
<PAGE>
Item 2. (Continued)
selling, general and administrative expenses associated with lower sales and
lower advertising spending and promotional expenses.
Net non-operating expenses were $2.3 million and $2.4 million for the three
months ended June 30, 1997 and 1996, respectively. Included in interest expense
is the amortization of debt issuance costs and discounts of $0.3 million for the
three months ended June 30, 1997 and 1996.
Net loss for the three months ended June 30, 1997 was ($1.1 ) million, compared
to ($0.4) million for the three months ended June 30, 1996, as a result of the
above discussed factors.
The net revenues and income from operations of the Company were as follows:
Income
Net Revenue from operations
----------- ---------------
Three Three
Months Ended Months Ended
June 30, June 30,
-------- --------
1996 1997 1996 1997
---- ---- ---- ----
Publishing Segment $25.7 $22.5 $1.1 $0.2
Entertainment Segment 4.2 3.8 0.9 1.0
--- --- --- ---
$29.9 $26.3 $2.0 $1.2
===== ===== ==== ====
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,
-------- --------
1996 1997 1996 1997
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $20.0 $16.5 $(0.2) $(0.6)
Foreign edition licensing 0.7 0.5 0.6 0.3
Automotive Magazines 5.0 5.5 0.7 0.5
--- --- --- ---
$25.7 $22.5 $1.1 $0.2
===== ======= ==== ====
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $16.5
million and $20.0 million for the three months ended June 30, 1997 and 1996,
respectively, a decrease of $3.5 million. Newsstand revenue for the three months
ended June 30, 1997 was $10.8 million, compared to $13.2 million for the three
months ended June 30, 1996, a decrease of $2.4 million. The decrease in
newsstand revenue is primarily attributable to a 24% decrease in the number of
newsstand copies sold of Penthouse magazine, as well as a decrease of 9% in the
9
<PAGE>
Item 2. (Continued)
number of newsstand copies sold of the affiliate publications during the three
months ended June 30, 1997, as compared to the 1996 period. The decline in
newsstand revenue and newsstand copies sold was partially offset by one
additional issue of Penthouse Letters being published during the three months
ended June 30, 1997, as compared to the 1996 period. Advertising revenue was
$3.3 million for the three months ended June 30, 1997, compared to $4.2 million
for the three months ended June 30, 1996, an decrease of $0.9 million. The
decline in advertising revenue is primarily attributable to a 23% decrease in ad
pages sold in Penthouse magazine for the three months ended June 30, 1997, as
compared to the 1996 period. The affiliate publications experienced a 11%
decline in advertising pages sold during the three months ended June 30, 1997,
compared to the 1996 period. The decline was partially offset by one additional
issue of Penthouse Letters being published during the three months ended June
30, 1997, as compared to the three months ended June 30, 1996. Subscription
revenue was $1.9 million and $2.1 million for the three months ended June 30,
1997 and 1996, respectively, a decrease of $0.2 million. This decrease is
attributable to a decline in the net revenue per subscription copy sold. The
decreased revenue per copy was due primarily to a change in the mix of sales
between agency sales, which generate a low per copy remit rate, and direct to
customer sales. The increase in agency sales during the three months ended June
30, 1997 resulted in an increase of 16% in subscription copies sold of Penthouse
magazine. Other revenue was $0.5 million for the three months ended June 30,
1997 and 1996, respectively.
Publishing-production, distribution and editorial expenses were $9.4 million for
the three months ended June 30, 1997, compared to $11.2 million for the three
months ended June 30, 1996, a decrease of $1.8 million. Paper costs were $3.0
million for the three months ended June 30, 1997, compared to $4.4 million for
the three months ended June 30, 1996, a decrease of $1.4 million. The decrease
is due both to a decline in the cost of paper and the reduced number of copies
printed of certain publications, partially offset by increased pages per copy of
certain publications and publishing one additional issue of Penthouse Letters
during the three months ended June 30, 1997, as compared to the three months
ended June 30, 1996. Print costs were $4.0 million for the three months ended
June 30, 1997, compared to $3.7 million for the three months ended June 30,
1996, an increase of $0.3 million. The increase is attributable to the increased
cost of production, increased pages per copy of certain publications and to the
printing of one additional issue of Penthouse Letters during the three months
ended June 30, 1997, as compared to the three months ended June 30, 1996.
Distribution costs were $1.5 million for the three months ended June 30, 1997,
compared to $1.4 million for the three months ended June 30, 1996, an increase
of $0.1 million. The increase is attributable to one additional issue of
Penthouse Letters being distributed offset by fewer overall copies being
distributed and lower costs associated with Value Packs. Editorial costs were
$0.8 million for the three months ended June 30, 1997, compared to $0.9 million
for the three months ended June 30, 1996, a decrease of $0.1 million, due to
decreased spending levels in Penthouse Comix and Forum, partially offset by
higher writeoffs of obsolete pictorial inventory. During the three months ended
June 30, 1997 the adjustment to the LIFO reserve resulted in an expense of $0.1
million, as compared to $0.4 million for the 1996 period.
Selling, general and administrative expenses were $7.4 million for the three
months ended June 30, 1997, compared to $8.5 million for the three months ended
June 30, 1996, a decrease of $1.1 million. The decrease is primarily
attributable to lower advertising expenditures ($0.4 million), lower retail
display allowances taken by retailers due to lower newsstand sales ($0.2
million) and lower advertising sales commissions related to lower sales ($0.1
million). Additionally, corporate overhead allocations to the Mens Magazine
group were lower ($0.7 million) during the three months ended June 30, 1997,
compared to the three months ended June 30, 1996. These decreases were partially
offset by increases in subscription and newsstand promotional spending.
Rent expense from affiliated companies represents charges from affiliated
companies for the use of the
10
<PAGE>
Item 2. (Continued)
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 $0.1 million for the three months ended
June 30, 1997, compared to $0.2 million for the three months ended June 30,
1996, 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 $0.2 million and $0.3 million for the three
months ended March 31, 1997 and 1996, respectively.
Foreign Edition Licensing
Revenues from licensing of foreign editions were $0.5 million and $0.7 million
for the three months ended June 30, 1997 and 1996, respectively. This decrease
is due primarily to the termination of a contract with the South African
licensee of Penthouse magazine and certain other licensees.
Selling, general and administrative expenses were $0.2 million and $0.1 million
for the three months ended June 30, 1997 and 1996, respectively. This increase
is primarily attributable higher corporate overhead allocations during the three
months ended June 30, 1997, as compared to the three months ended June 30,1996.
Automotive Magazines
Revenues for the Automotive Magazines were $5.5 million for the three months
ended June 30, 1997, compared to revenues of $5.0 million for the three months
ended June 30, 1996, an increase of $0.5 million. Newsstand revenues were $1.2
million and $1.1 million for the three months ended June 30, 1997 and 1996,
respectively, an increase of $0.1 million due primarily to increased newsstand
circulation for the three month period ended June 30, 1997. Advertising revenues
were $3.3 million for the three months ended June 30, 1997, compared to $3.0
million for the three months ended June 30, 1996, an increase of $0.3 million,
resulting primarily from an increase in advertising page rates and an increase
in advertising pages sold. Subscription revenues were $0.9 million for the three
month period ended June 30, 1997 and 1996, respectively.
Publishing-production, distribution and editorial expenses were $2.6 million
ended June 30, 1997 and 1996, respectively. Paper costs were $0.9 million for
the three months ended June 30, 1997, compared to $1.2 million for the three
months ended June 30, 1996, a decrease of $0.3 million. The decrease in paper
costs is primarily attributable to a decrease in the cost of paper, partially
offset by costs associated with increased copies printed and increased pages per
issue during the three months ended June 30, 1997. Print costs were $1.0 million
and $0.9 million for the three months ended June 30, 1997 and 1996, an increase
of $0.1 million. The increase is primarily attributable to costs associated with
increased copies printed and increased pages per issue. Distribution costs were
$0.6 million and $0.5 million for the three months ended June 30, 1997 and June
30, 1996, respectively an increase of $0.1 million. Editorial costs were $0.1
million for the three months ended June 30, 1997 and 1996.
Selling, general and administrative expenses were $2.1 million and $1.5 million
for the three months ended June 30, 1997 and 1996, respectively, an increase of
$0.6 million. The increase is primarily attributable to an increase in corporate
overhead allocations charged to the Automotive Magazines ($0.2 million) and
increased subscription spending during the three months ended June 30, 1997, as
compared to the three months ended June 30, 1996.
Depreciation and amortization was $0.2 million for the three months ended June
30, 1997, compared to $0.1
11
<PAGE>
Item 2. (Continued)
million for the three months ended June 30, 1996, an increase of $0.1 million.
Entertainment Segment
Revenues from the Entertainment Segment were $3.8 million for the three months
ended June 30, 1997, compared to $4.2 million for the three months ended June
30, 1996, a decrease of $0.4 million. The Company's video business revenues
increased $0.4 million, the pay-per-call business revenues decreased $1.1
million and the internet business revenues increased $0.4 million. The Company's
video division revenue increase is primarily due to revenues received from the
sale of five new video cassettes releases through the Company's national
wholesale distributor during the three months ended June 30, 1997 as compared to
one new title release during the three months ended June 30, 1996. Additionally,
the Company entered into a video licencing agreement with a foreign licensee
resulting in increased revenues. Offsetting these increases, the Company has
discontinued the sale of its unprofitable CD-ROM products and accordingly there
were no revenues during the three months ended June 30,1997. There were $0.1
million of such revenues for the three months ended June 30, 1996. The decrease
in pay-per-call revenues is primarily attributable 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 new
parameters took effect in mid June of 1996. Additionally, lower circulation of
the Company's Mens Magazines contributed to lower revenues. Internet revenues
increased due to revenues received from a joint venture internet site that began
operation in April of 1997, which resulted in revenues of $0.4 million.
Direct costs were $1.6 million for the three months ended June 30, 1997,
compared to $2.2 million for the three months ended June 30, 1996, a decrease of
$0.6 million. The Company's video division experienced a $0.2 million decrease
in direct expenses primarily associated with lower video production costs and
the discontinuation of the Company's CD-ROM business, offset by higher
fulfillment and distribution costs related to higher sales volume and costs
incurred relating to the production of a feature motion picture. Pay-per-call
direct costs decreased $0.3 million due to lower sales volume, as previously
discussed.
Selling, general and administrative expenses were $1.1 million for the three
months ended June 30, 1997 and June 30, 1996.
12
<PAGE>
Item 2. (Continued)
Results of Operations (Six Months Ended June 30, 1997 vs. 1996)
The Company's revenues were $50.4 million for the six months ended June 30,
1997, compared to revenues of $57.9 million for the six months ended June 30,
1996, a decrease of $7.5 million. Newsstand revenues were $23.2 million and
$27.5 million for the six months ended June 30, 1997 and 1996, respectively, a
decrease of $4.3 million. Newsstand revenues for Mens' Magazines were $20.8 and
$25.0 million for the six months ended June 30, 1997 and 1996, respectively, a
decrease of $4.2 million. Newsstand revenues from the Automotive Magazines were
$2.4 million and $2.5 million for the six months ended June 30, 1997 and 1996,
respectively, a decrease of $0.1 million. Advertising revenues were $12.9
million and $14.2 million for the six months ended June 30, 1997 and 1996,
respectively, a decrease $1.3 million. The decrease in advertising revenues is
attributable to a $1.8 million decrease in Mens' Magazines, partially offset by
a $0.5 million increase in Automotive Magazines. Subscription revenues were $5.5
million and $5.9 million for the six months ended June 30, 1997 and 1996,
respectively, a decrease of $0.4 million. The decrease in subscription revenues
is attributable to a $0.3 million decrease in revenues from Mens' Magazines and
a $0.1 million decrease in revenues from Automotive Magazines. Revenues for the
Entertainment segment were $6.7 million and $7.9 million for the six months
ended June 30, 1997 and 1996, respectively, a decrease of $1.2 million. Revenues
from the Company's video business decreased $0.1 million, revenues from the
Company's pay-per-call business decreased $1.2 million and revenues from the
Company's internet business increased $0.1 million during the six months ended
June 30, 1997, as compared to the six month period ended June 30, 1996.
Income from operations was $2.0 million for the six months ended June 30, 1997,
compared to $3.0 million for the six months ended June 30, 1996. Income from
operations was negatively impacted by decreased revenues, as discussed above,
which was partially offset by a decrease in production, distribution and
editorial costs resulting from a reduction in the number of magazine copies
printed, as well as lower selling expenses associated with lower sales,
headcount reductions due to corporate restructuring and other spending
efficiencies, which reduced selling, general and administrative costs in 1997.
Net non-operating expenses were $2.4 million and $2.8 million for the six months
ended June 30, 1997 and 1996, respectively. Included in interest expense is the
amortization of debt issuance costs and discounts of $0.6 million for the six
months ended June 30, 1997 and 1996.
Net loss for the six months ended June 30, 1997 was ($2.7 ) million, compared to
($1.9) million for the six months ended June 30, 1996, as a result of the above
discussed factors.
The net revenues and income from operations of the Company were as follows:
Income
Net Revenue from operations
----------- ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1996 1997 1996 1997
---- ---- ---- ----
Publishing Segment $50.0 $43.7 $1.3 $1.0
Entertainment Segment 7.9 6.7 1.7 1.0
--- --- --- ---
$57.9 $50.4 $3.0 $2.0
===== ===== ==== ====
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 Revenues from operations
------------ ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1996 1997 1996 1997
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $38.4 $31.9 $(1.0) $(1.0)
Foreign edition licensing 1.3 1.2 1.0 0.9
Automotive Magazines 10.3 10.6 1.3 1.1
---- ---- --- ---
$50.0 $43.7 $1.3 $1.0
===== ======= ==== ====
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $31.9
million and $38.4 million for the six months ended June 30, 1997 and 1996,
respectively, a decrease of $6.5 million. Newsstand revenue for the six months
ended June 30, 1997 was $20.8 million, compared to $25.0 million for the six
months ended June 30, 1996, a decrease of $4.2 million. The decrease in
newsstand revenue is primarily attributable to a decrease of 19% in the number
of newsstand copies sold of Penthouse magazine, as well as a decrease of 14% in
the number of newsstand copies sold of the Affiliate Publications during the six
months ended June 30, 1997, as compared to the 1996 period. Advertising revenue
was $6.5 million for the six months ended June 30, 1997, compared to $8.3
million for the six months ended June 30, 1996, an decrease of $1.8 million. The
decline in advertising revenue is primarily attributable to a 18% decrease in ad
pages sold in Penthouse magazine for the six months ended June 30, 1997, as
compared to the 1996 period. The Affiliate Publications experienced a 26%
decline in advertising pages sold during the six months ended June 30, 1997,
compared to the 1996 period. The decline in newsstand circulation also resulted
in lower advertising rates in 1997. Subscription revenue was $3.8 million and
$4.1 million for the six months ended June 30, 1997 and 1996, respectively, a
decrease of $0.3 million. This decrease is attributable to a 2% decline in the
number of subscription copies sold, as well as decreased revenue per copy
primarily due to a change in the mix of sales between agency sales, which
generate a lower revenue per copy, and direct to customer sales. Other revenue
was $0.8 million for the six months ended June 30, 1997, compared to $1.0
million for the six months ended June 30, 1996, a decrease of $0.2 million. The
decrease in other revenues is primarily attributable to a decrease in revenues
received from the sale of past issues of the Company's publications sold as
value-packs and a decrease in royalty revenue.
Publishing-production, distribution and editorial expenses were $18.2 million
for the six months ended June 30, 1997, compared to $21.5 million for the six
months ended June 30, 1996, a decrease of $3.3 million. Paper costs were $6.1
million for the six months ended June 30, 1997, compared to $8.7 million for the
six months ended June 30, 1996, a decrease of $2.6 million. The decrease is due
both to a decline in the cost of paper and the reduced number of copies printed
of certain publications, as compared to the six months ended June 30, 1996.
Print costs were $7.5 million for the six months ended June 30, 1997, compared
to $7.2 million for the six months ended June 30, 1996, an increase of $0.3
million. The increase is due to an increase in the cost of
14
<PAGE>
Item 2. (Continued)
production and the increase in the pages per copy of magazines printed, offset
by the decreased number of copies printed during the six months ended June 30,
1997, as compared to the six months ended June 30, 1996. Distribution costs were
$2.6 million for the six months ended June 30, 1997, compared to $2.9 million
for the six months ended June 30, 1996, a decrease of $0.3 million. The decrease
is attributable to fewer copies being distributed and lower costs associated
with value packs. Editorial costs were $1.8 million for the six months ended
June 30, 1997, compared to $1.9 million for the six months ended June 30, 1996,
a decrease of $0.1 million, due to decreased spending levels in Penthouse Comix
and Forum, partially offset by higher writeoffs of obsolete pictorial inventory.
During the six months ended June 30, 1997 the adjustment to the LIFO reserve
increased expense by $0.1 million, as compared to the 1996 period.
Selling, general and administrative expenses were $14.1 million for the six
months ended June 30, 1997, compared to $16.9 million for the six months ended
June 30, 1996, a decrease of $2.8 million. The decrease is primarily
attributable to lower salaries, employee benefits, travel and entertainment, and
temporary personnel expenses in 1997, as a result of corporate restructuring
($0.5 million), lower advertising expenditures and related costs ($0.7 million)
and lower retail display allowances taken by retailers due to lower newsstand
sales ($0.5 million). Additionally, corporate overhead allocations to the Mens
Magazine group were $1.0 million lower during the six months ended June 30,
1997, compared to the six months ended June 30, 1996.
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
six months ended June 30, 1997, compared to $0.4 million for the six months
ended June 30, 1996, a decrease of $0.2 million, due to lower operating costs
incurred by the affiliated companies resulting in a lower rent charge.
Depreciation and amortization was $0.4 million and $0.6 million for the six
months ended June 30, 1997 and 1996, respectively.
Foreign Edition Licensing
Revenues from licensing of foreign editions were $1.2 million and $1.3 million
for the six months ended June 30, 1997 and 1996, respectively. This decrease is
due primarily to the loss of the South African licensee and reduced revenues
from several licensees due in part to the timing of payments received for
licensees.
Selling, general and administrative expenses were $0.3 million for the six
months ended June 30, 1997 and 1996, respectively.
Automotive Magazines
Revenues for the Automotive Magazines were $10.6 million for the six months
ended June 30, 1997, compared to revenues of $10.3 million for the six months
ended June 30, 1996, a decrease of $0.3 million. Newsstand revenues were $2.4
million and $2.5 million for the six months ended June 30, 1997 and 1996,
respectively, a decrease of $0.1 million, due primarily to an automotive special
issue being published during the six months ended June 30, 1996. Advertising
revenues were $6.4 million for the six months ended June 30, 1997, compared to
$5.9 million for the six months ended June 30, 1996, an increase of $0.5
million, resulting primarily from an increase in advertising page rates and an
increase in advertising pages sold. Subscription revenues were $1.8
15
<PAGE>
Item 2. (Continued)
million and $1.9 million for the period ended June 30, 1997 and 1996,
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 $5.0 million and
$5.6 million for the six months ended June 30, 1997 and 1996, respectively, a
decrease of $0.6 million. Paper costs were $1.8 million for the six months ended
June 30, 1997, compared to $2.5 million for the six months ended June 30, 1996,
a decrease of $0.7 million. The decrease in paper costs is primarily
attributable to a decrease in the cost of paper and an automotive special being
published during the six months ended June 30, 1996, partially offset by costs
associated with more magazine copies being printed and more pages per issue.
Print costs were $2.0 million for the six months ended June 30, 1997 and 1996,
respectively. Distribution costs were $1.1 million and $1.0 million for the six
months ended June 30, 1997 and 1996, respectively, an increase of $0.1 million.
The increase is due primarily to more copies being distributed in 1997.
Editorial costs were $0.2 million for the six months ended June 30, 1997 and
1996.
Selling, general and administrative expenses were $4.0 million and $3.1 million
for the six months ended June 30, 1997 and 1996, respectively, an increase of
$0.9 million. The increase is primarily attributable to an increase in corporate
overhead allocations charged to the Automotive Magazines($0.4 million),
increased employees costs ($0.1 million) and increased subscription spending
($0.3 million) during the six months ended June 30, 1997, as compared to the six
months ended June 30, 1996.
Depreciation and amortization was $0.4 million for the six months ended June 30,
1997, compared to $0.3 million for the six months ended June 30, 1996, an
increase of $0.1 million.
Entertainment Segment
Revenues from the Entertainment Segment were $6.7 million for the six months
ended June 30, 1997, compared to $7.9 million for the six months ended June 30,
1996, a decrease of $1.2 million. The Company's video and CD-ROM business
revenues decreased $0.1 million, the pay-per-call business revenues decreased
$1.2 million and the internet business revenues increased $0.1 million. The
Company's video division revenue decrease is due primarily to the Company's
discontinuance in late 1996 of its unprofitable CD-ROM products. Accordingly,
there were no revenues during the six months ended June 30,1997. This decrease
was partially offset by revenues received from the sale of six new video
cassettes releases through the Company's national wholesale distributor during
the six months ended June 30, 1997 as compared to two new title releases during
the six months ended June 30, 1996. The decrease in pay-per-call revenues is
primarily attributable 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 new parameters took effect in mid June
of 1996. Additionally, lower circulation of the Company's Mens Magazines
contributed to lower revenues. Internet revenues increased due to revenues
received from a joint venture internet site that began operation in April of
1997, which resulted in revenues of $0.4 million, partially offset by lower
revenues due to technical problems encountered in the transition to a new server
hosting the Company's internet site software which were resolved in the first
quarter of 1997.
Direct costs were $3.3 million for the six months ended June 30, 1997, compared
to $4.0 million for the six months ended June 30, 1996, a decrease of $0.7
million. The Company's video division experienced a $0.3
16
<PAGE>
Item 2. (Continued)
million decrease in direct costs primarily associated with lower video
production costs, offset by higher fulfillment and distribution costs associated
with a higher sales volume. Pay-per-call direct costs decreased $0.3 million,
due to lower sales volume, as previously discussed.
Selling, general and administrative expenses were $2.3 million for the six
months ended June 30, 1997 and June 30, 1996.
Liquidity and Capital Resources
At June 30, 1997, the Company had $5.9 million in cash and cash equivalents,
compared to $7.2 million at December 31, 1996. The decrease in cash and cash
equivalents during the six months ended June 30, 1997 resulted from net cash
flows used in operating activities of $0.9 million, cash flows used in investing
activities of $0.1 million, and cash flows used in financing activities of $0.2
million.
Cash flows from operating activities
Net cash used in operating activities was $0.9 million for the six months ended
June 30, 1997, compared to net cash used in operating activities of $0.3 million
for the six months ended June 30, 1996. Net cash used in operating activities
for the six months ended June 30, 1997 and 1996 was primarily the result of the
net loss for the period.
Cash flows from investing activities
Cash used in investing activities for capital expenditures was $0.1 million and
$0.3 million for six months ended June 30, 1997 and 1996, respectively.
Cash flows from financing activities
Cash flows used in financing activities were $0.2 million for the six months
ended June 30, 1997, compared to cash flows used in financing activities of $0.8
million for the six months ended June 30, 1996. Affiliated company investments
and advances at June 30, 1997 increased from the December 31, 1996 balance,
whereby the Company is owed $0.9 million by GMI as of June 30, 1997. 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, in the amount of $0.9 million, has not been made by
August 13, 1997. 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
pending transactions.
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.
17
<PAGE>
Future outlook
Due to factors discussed in "Liquidity and Capital Resources", the Company's
cash balance at June 30, 1997 decreased to $5.9 million, from $7.2 million at
December 31, 1996. The Company is obligated to make a $4.2 million interest
payment on its Notes on December 31, 1997.
The Company's results from operations continues to be negatively impacted by
decreased newsstand circulation and advertising revenues from Mens Magazines.
Newsstand circulation has continued to decline during the first half of 1997
resulting in continued net losses to the Company. While it is difficult to
predict future newsstand sales of the Company's magazines, it is unlikely that
the Company can achieve profitable results of operations during 1997, if such
sales continue to decline. Furthermore, under the Indenture, should the Company
incur additional losses in the future, such that the Company's net worth
(deficiency) declines from the amount at June 30, 1997 of ($78.8) million, below
($81.6) 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.
18
<PAGE>
Part II-Other Information
Item 1. Legal Proceedings
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 is not reasonably
likely to 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 June
30, 1997.
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: August 14, 1997 By: /s/ Patrick J. Gavin
------------------------
Signature
Patrick J. Gavin
Executive Vice President
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 JUNE 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,927
<SECURITIES> 0
<RECEIVABLES> 14,385
<ALLOWANCES> 0
<INVENTORY> 4,362
<CURRENT-ASSETS> 28,317
<PP&E> 4,227
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,779
<CURRENT-LIABILITIES> 33,409
<BONDS> 79,379
0
0
<COMMON> 5
<OTHER-SE> (75,265)
<TOTAL-LIABILITY-AND-EQUITY> 44,779
<SALES> 50,407
<TOTAL-REVENUES> 50,407
<CGS> 26,510
<TOTAL-COSTS> 21,677
<OTHER-EXPENSES> 247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,644
<INCOME-PRETAX> (2,671)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,671)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
