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, 1998 File No. 33-76716
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General Media, Inc.
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(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
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(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, 1998
----- ------------------------------
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 18
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 18
Signatures 19
Exhibit Index 20
2
<PAGE>
Item 1. Financial Statements
General Media, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
-------- --------
1997 1998 1997 1998
-------- -------- -------- --------
(restated-note2) (restated-note2)
<S> <C> <C> <C> <C>
Net revenues
Publishing
Newsstand $ 23,224 $ 23,660 $ 12,128 $ 11,641
Advertising 12,948 13,451 $ 6,587 $ 7,117
Subscription 5,508 6,002 $ 2,774 $ 2,959
Other 2,002 1,806 $ 1,021 $ 891
$ 0
Entertainment 6,725 10,821 $ 3,801 $ 5,129
-------- -------- -------- --------
50,407 55,740 26,311 27,737
-------- -------- -------- --------
Operating costs and expenses
Publishing-production, distribution
and editorial 22,981 22,735 11,923 11,187
Entertainment- direct costs 3,292 1,473 1,643 504
Selling, general and administrative 20,743 25,287 10,874 12,662
Rent expense from affiliated companies 247 237 119 113
Depreciation and amortization 934 915 473 458
-------- -------- -------- --------
Total operating costs and expenses 48,197 50,647 25,032 24,924
-------- -------- -------- --------
Income from operations 2,210 5,093 1,279 2,813
-------- -------- -------- --------
Other income (expense)
Interest expense (4,954) (4,964) (2,477) (2,487)
Interest income 310 279 182 160
-------- -------- -------- --------
Net Income(Loss) (2,434) 408 (1,016) 486
Accumulated deficit-beginning
of period (see note 2) (73,299) (75,214) (74,717) (75,292)
-------- -------- -------- --------
Less: Cash dividend paid (400) (400)
Accumulated deficit-end of period ($75,733) ($75,206) ($75,733) ($75,206)
======== ======== ======== ========
</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,
1997 1998
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,308 $ 8,975
Accounts receivable, net of allowance
for doubtful accounts 9,177 10,586
Inventories 5,097 5,108
Prepaid expenses and other current assets 3,580 3,881
Due from affiliated companies 1,148 1,252
Loan to shareholder 732 844
-------- --------
Total current assets 27,042 30,646
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 3,793 3,381
OTHER ASSETS
Intangible assets, net 3,194 2,886
Deferred subscription aquisition costs 3,075 2,854
Deferred debt issuance costs, net 2,988 2,493
Loan to affiliated company 1,086 1,086
Other 1,449 1,465
-------- --------
11,792 10,784
-------- --------
$ 42,627 $ 44,811
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 13,909 $ 13,803
Deferred subscription revenue 11,748 13,668
Other liabilities and accrued expenses 4,804 5,636
-------- --------
Total current liabilities 30,461 33,107
SENIOR SECURED NOTES 79,467 79,556
UNEARNED REVENUE 4,699 4,140
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 (75,214) (75,206)
-------- --------
(73,791) (73,783)
-------- --------
$ 42,627 $ 44,811
======== ========
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,
--------
1997 1998
------- -------
(restated-note2)
Cash flows from operating activities
Net loss ($2,434) $ 408
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 934 915
Amortization of debt issuance costs
and discounts 584 584
Net change in operating assets
and liabilities 58 570
------- -------
Net cash (used in) provided by operations (858) 2,477
------- -------
Cash flows from investing activities
Capital expenditures (136) (194)
------- -------
Net cash used in investing activities (136) (194)
------- -------
Cash flows from financing activities
Advances to affiliated companies (243) (574)
Repayments by affiliated companies 470
Dividends paid (400)
Loan to shareholder (112)
------- -------
Net cash used in financing activities (243) (616)
------- -------
Net (decrease) increase in cash and
cash equivalents (1,237) 1,667
Cash and cash equivalents at beginning of period 7,164 7,308
------- -------
Cash and cash equivalents at end of period $ 5,927 $ 8,975
======= =======
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, 1997 has been derived from the audited
financial statements at that date.
2. Inventories
Inventories consist of the following:
December 31, June 30,
1997 1998
------ ------
Paper and printing $2,063 $2,028
Editorials and pictorial 2,210 2,163
Film and programming costs 824 917
------ ------
$5,097 $5,108
====== ======
In 1997, the Company changed its method of determining the cost of paper and
printing inventories from the LIFO method to the FIFO method. Under the current
economic environment of low inflation, the Company believes that the FIFO method
will result in a better measurement of operating results. This change has been
applied by retroactively restating the accompanying consolidated financial
statements. The effect of the restatement was to decrease net loss for the six
months ended June 30, 1997 by $237,000.
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.
6
<PAGE>
General Media, Inc. and Subsidiaries
Notes to Condensed Consolidated
Financial Statements (Unaudited)
(amounts in thousands)
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, 1998, 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, 1998 and
1997 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, interactive products and internet
services.
Effective January 1, 1998, the Company changed its presentation of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
whereby income from operations of each business unit excludes corporate
administrative expenses. Corporate administrative expenses includes executive,
human resources, finance and accounting, management information systems and
various other expenses. The 1997 periods have been restated to conform to the
1998 presentation.
Results of Operations (Three Months Ended June 30, 1998 vs. 1997)
The Company's revenues were $27.7 million for the three months ended June 30,
1998, compared to revenues of $26.3 million for the three months ended June 30,
1997, an increase of $1.4 million. Newsstand revenues were $11.6 million and
$12.1 million for the three months ended June 30, 1998 and 1997, respectively, a
decrease of $0.5 million. Newsstand revenues for Mens Magazines were $10.5 and
$10.9 million for the three months ended June 30, 1998 and 1997, respectively, a
decrease of $0.4 million. Newsstand revenues from the Automotive Magazines were
$1.2 million and $1.3 million for the three months ended June 30, 1998 and 1997,
respectively, a decrease of $0.1 million. Advertising revenues were $7.1 million
and $6.6 million for the three months ended June 30, 1998 and 1997,
respectively, an increase of $0.5 million. Advertising revenues from Mens
Magazines increased $0.1 million and advertising revenues from Automotive
Magazines increased $0.4 million during the period. Subscription revenues were
$3.0 million and $2.8 million for the three months ended June 30, 1998 and 1997,
respectively, an increase of $0.2 million. The increase in subscription revenues
is attributable to a $0.2 million increase in subscription revenues from
Automotive Magazines. Revenues for the Entertainment segment were $5.1 million
and $3.8 million for the three months ended June 30, 1998 and 1997,
respectively, an increase of $1.3 million. Revenues from the Company's video
business were $0.8 million and $1.0 million for the three months ended June 30,
1998 and 1997, respectively, a decrease of $0.2 million. Revenues from the
Company's pay-per-call business were $0.6 million and $2.1 for the three months
ended June 30, 1998 and 1997, respectively, a decrease of $1.5 million. Revenues
from the Company's internet business were $3.8 million and $0.7 million for the
three months ended June 30, 1998 and 1997, respectively, an increase of $3.1
million.
8
<PAGE>
Item 2. (Continued)
Income from operations was $2.8 million for the three months ended June 30,
1998, compared to $1.3 million for the three months ended June 30, 1997. Income
from operations was positively impacted by increased revenues, as discussed
above, which was partially offset by an increased selling, general and
administrative expenses associated with increased sales and increased
advertising and promotional expenses.
Net non-operating expenses were $2.3 million for the three months ended June 30,
1998 and 1997. Included in interest expense is the amortization of debt issuance
costs and discounts of $0.3 million for the three months ended June 30, 1998 and
1997.
Net income/(loss) for the three months ended June 30, 1998 was $0.5 million,
compared to ($1.0) million for the three months ended June 30, 1997, 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,
-------- --------
1997 1998 1997 1998
------- ------- ------ ------
Publishing Segment $ 22.5 $ 22.6 $ 3.8 $ 3.5
Entertainment Segment 3.8 5.1 1.6 3.3
------- ------- ------ ------
$ 26.3 $ 27.7 $ 5.4 $ 6.8
Corporate Administrative
Expenses (4.1) (4.0)
------- ------- ------ ------
$ 26.3 $ 27.7 $ 1.3 $ 2.8
======= ======= ====== ======
Publishing Segment
The net revenues and income from operations of the Publishing Segment were as
follows:
Income
Net Revenue from operations
----------- ---------------
Three Three
Months Ended Months Ended
June 30, June 30,
-------- --------
1997 1998 1997 1998
------- ------- ------ ------
Penthouse Magazine and
the Affiliate Publications $ 16.5 $ 16.1 $ 2.4 $ 2.4
Foreign edition licensing 0.5 0.6 0.4 0.4
Automotive Magazines 5.5 5.9 1.0 0.7
------- ------- ------ ------
$ 22.5 $ 22.6 $ 3.8 $ 3.5
======= ======= ====== ======
9
<PAGE>
Item 2. (Continued)
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $16.1
million and $16.5 million for the three months ended June 30, 1998 and 1997,
respectively, a decrease of $0.4 million. Newsstand revenue was $10.5 million
and $10.9 million for the three months ended June 30, 1998 and 1997,
respectively, a decrease of $0.4 million. The decrease in newsstand revenue is
primarily attributable to one less issue of each Penthouse Comix, Penthouse
Letters and Forum magazines on sale during the 1998 period, partially offset by
A 10% increase in the number of newsstand copies sold of Penthouse magazine.
Advertising revenue was $3.4 million and $3.3 million for the three months ended
June 30, 1998 and 1997, respectively, an increase of $0.1 million. The increase
in advertising revenue is primarily attributable to an increase in advertising
revenue in Penthouse magazine for the three months ended June 30, 1998, as
compared to the 1997 period. Subscription revenue was $1.9 million for the three
months ended June 30, 1998 and 1997.
Publishing-production, distribution and editorial expenses were $8.3 million and
$9.3 million for the three months ended June 30, 1998 and 1997, respectively, a
decrease of $1.0 million. Paper costs were $3.2 million for the three months
ended June 30, 1998, compared to $3.3 million for the three months ended June
30, 1997, a decrease of $0.1 million. The decrease is due to the reduced number
of pages per issue and a decrease in copies printed of certain publications as
well as fewer issues of certain publications printed, as discussed above,
partially offset by an increased cost of paper during the three months ended
June 30, 1998, as compared to the three months ended June 30, 1997. Print costs
were $3.0 million for the three months ended June 30, 1998, compared to $3.8
million for the three months ended June 30, 1997, a decrease of $0.8 million.
The decrease is due to the decrease in the number of pages per issue and copies
printed of certain publications and fewer issues of certain publications printed
during the period, as well as reduced printing costs due to the renegotiation of
the Company's printing contracts in the third quarter of 1997. Distribution
costs were $1.3 million for the three months ended June 30, 1998, compared to
$1.5 million for the three months ended June 30, 1997, a decrease of $0.2
million. The decrease is attributable to fewer copies being distributed.
Editorial costs were $0.9 million for the three months ended June 30, 1998 and
1997.
Selling, general and administrative expenses were $5.4 million for the three
months ended June 30, 1998, compared to $4.8 million for the three months ended
June 30, 1997, an increase of $0.6 million. The increase is primarily
attributable to the write off of an uncollectible advertising accounts
receivable of $0.9 million which arose through billings during the three months
ended June 30, 1998. The Company terminated its agreement with an advertising
agency that had an exclusive arrangement to sell audiotext advertising in the
Company's magazines. The Company has entered into a new agreement with another
advertising agency on similar terms to that of the prior agreement. The Company
will experience additional bad debt expense through the third quarter of 1998,
as advertising pages in future issues had been printed prior to termination of
the agreement. The Company expects to be able to return to revenue levels
generated from the previous advertising agency through its new agreement
beginning in the first half of 1999.
Foreign Edition Licensing
Revenues from licensing of foreign editions, which are included in other
revenue, were $0.6 million and $0.5 million for the three months ended June 30,
1998 and 1997, respectively, an increase of $0.1 million. Selling, general and
administrative expenses were $0.1 million for the three month period ended June
30, 1998 and 1997.
10
<PAGE>
Item 2. (Continued)
Automotive Magazines
Revenues for the Automotive Magazines were $5.9 million and $5.5 million for the
three months ended June 30, 1998 and 1997, respectively, an increase of $0.4
million. Newsstand revenues were $1.2 million and $1.3 million for the three
months ended June 30, 1998 and 1997, respectively, a decrease of $0.1 million.
The decrease is due to fewer copies sold, partially offset by increased cover
prices of Four Wheeler and Stock Car magazines. Advertising revenues were $3.7
million and $3.3 million for the three months ended June 30, 1998 and 1997,
respectively, an increase of $0.4 million, resulting from an increase in
advertising page rates, as well as advertising revenue of $0.1 million generated
from Four Wheeler Television, which produced its first in a series of 13 cable
television shows in February 1998. Subscription revenues were $1.0 million and
$0.9 million for the three month period ended June 30, 1998 and 1997,
respectively, an increase of $0.1 million due to an increase in subscription
copies sold.
Publishing-production, distribution and editorial expenses were $2.9 million and
$2.6 million for the three months ended June 30, 1998 and 1997, respectively, an
increase of $0.3 million. Paper costs were $1.2 million and $0.9 million for the
three months ended June 30, 1998 and June 30, 1998, respectively, an increase of
$0.3 million. Paper costs increased due to an increase in magazine copies
printed, increased pages per copy and an increase in the cost of paper. Print
costs were $1.0 million for the three months ended June 30, 1998 and 1997.
Distribution costs were $0.6 million for the three months ended June 30, 1998
and 1997. Editorial costs were $0.1 million for the three months ended June 30,
1998 and 1997.
Selling, general and administrative expenses were $2.3 million and $1.9 million
for the three months ended June 30, 1998 and 1997, respectively, an increase of
$0.4 million. The increase is primarily attributable to increased subscription
acquisition spending during the three months ended June 30, 1998, as compared to
the three months ended June 30, 1997.
Entertainment Segment
Revenues from the Entertainment Segment were $5.1 million for the three months
ended June 30, 1998, compared to $3.8 million for the three months ended June
30, 1997, an increase of $1.3 million. The Company's video business revenues
were $0.8 million for the three months ended June 30, 1998 compared to $1.0
million for the three months ended June 30, 1997, a decrease of $0.2 million.
The decrease is due to fewer videocassettes sold through the Company's wholesale
distributor due primarily to fewer new releases in 1998.Revenues from the
Company's pay-per-call business were $0.7 million and $2.1 million for the three
months ended June 30, 1998 and 1997, respectively, a decrease of $1.4 million.
Effective January 1, 1998, the Company engaged a new service bureau to process
its pay-per-call business. Revenues for the second quarter of 1998 were lower
due to the arrangement with its new service bureau whereby the Company receives
a fixed rate per minute, on a net basis. The arrangement with the Company's
previous service bureau paid revenue on a gross basis and the Company paid
certain expenses directly. Under the new agreement these expenses have been
eliminated. The Company's internet business revenues were $3.8 million and $0.7
million for the three months ended June 30, 1998 and 1997, respectively, an
increase of $3.1 million. Internet revenues increased due to increased revenues
received from the sale of subscriptions to the Company's "Private Collection",
contained within the Company's internet site. Revenues were also received from a
new arrangement, whereby the Company receives a minimum guaranteed revenue from
another internet site "linked" to the Company's internet site. Such arrangement
began in April of 1997.
11
<PAGE>
Item 2. (Continued)
Direct costs were $0.4 million for the three months ended June 30, 1998,
compared to $1.4 million for the three months ended June 30, 1997, a decrease of
$1.0 million. The decrease is due to the change in service bureaus processing
the Company's pay-per-call business, as discussed above.
Selling, general and administrative expenses were $1.5 million and $0.8 million
for the three months ended June 30, 1998 and June 30, 1997, respectively, an
increase of $0.7 million. The increase is due primarily to higher computer
processing, personnel and commission expense relating to the internet business
increased revenues.
Corporate Administrative Expense
Corporate administrative expenses includes executive, human resources, finance
and accounting, management information systems and various other expenses.
Corporate administrative expenses were $4.0 million for the three months ended
June 30, 1998, compared to $4.1 million for the three months ended June 30,
1997, a decrease of $0.1 million, due primarily to lower depreciation expense.
Rent Expense From Affiliated Companies
Rent expense from affiliated companies represents charges from affiliated
companies for the use of the Company's executive offices. The charge is based
upon the Company's proportionate share of the operating expenses of such
offices. Rent expense from affiliated companies was $0.1 million for the three
months ended June 30, 1998 and 1997.
Results of Operations (Six Months Ended June 30, 1998 vs. 1997)
The Company's revenues were $55.7 million for the six months ended June 30,
1998, compared to revenues of $50.4 million for the six months ended June 30,
1997, an increase of $5.3 million. Newsstand revenues were $23.7 million and
$23.2 million for the six months ended June 30, 1998 and 1997, respectively, an
increase of $0.5 million. Newsstand revenues for Mens Magazines were $21.1 and
$20.8 million for the six months ended June 30, 1998 and 1997, respectively, an
increase of $0.3 million. Newsstand revenues from the Automotive Magazines were
$2.6 million and $2.4 million for the six months ended June 30, 1998 and 1997,
respectively, an increase of $0.2 million. Advertising revenues were $13.5
million and $12.9 million for the six months ended June 30, 1998 and 1997,
respectively, an increase of $0.6 million. Advertising revenues from Mens
Magazines decreased $0.2 million and advertising revenues from Automotive
Magazines increased $0.8 million during the period. Subscription revenues were
$6.0 million and $5.5 million for the six months ended June 30, 1998 and 1997,
respectively, an increase of $0.5 million. The increase in subscription revenues
is attributable to a $0.2 million increase in subscription revenues from Mens
Magazines and an increase of $0.3 million in subscription revenues from
Automotive Magazines. Revenues for the Entertainment segment were $10.8 million
and $6.7 million for the six months ended June 30, 1998 and 1997, respectively,
an increase of $4.1 million. Revenues from the Company's video business were
$2.0 million and $1.6 million for the six months ended June 30, 1998 and 1997,
respectively, an increase of $0.4 million. Revenues from the Company's
pay-per-call business were $1.6 million and $4.4 for the six months ended June
30, 1998 and 1997, respectively, a decrease of $2.8 million. Revenues from the
Company's internet business were $7.3 million and $0.7 million for the six
months ended June 30, 1998 and 1997, respectively, an increase of $6.6 million.
12
<PAGE>
Item 2. (Continued)
Income from operations was $5.1 million for the six months ended June 30, 1998,
compared to $2.2 million for the six months ended June 30, 1997. Income from
operations was positively impacted by increased revenues, as discussed above,
which was partially offset by increased selling, general and administrative
expenses associated with increased sales and increased advertising and
promotional expenses.
Net non-operating expenses were $4.7 million and $4.6 million for the six months
ended June 30, 1998 and 1997, 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, 1998 and 1997.
Net income/(loss) for the six months ended June 30, 1998 was $0.4 million,
compared to ($2.4) million for the six months ended June 30, 1997, 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,
-------- --------
1997 1998 1997 1998
------- ------- ------- -------
Publishing Segment $ 43.7 $ 44.9 $ 8.2 $ 6.7
Entertainment Segment 6.7 10.8 1.9 6.5
------- ------- ------- -------
$ 50.4 $ 55.7 $ 10.1 $ 13.2
Corporate Administrative Expenses (7.9) (8.1)
------- ------- ------- -------
$ 50.4 $ 55.7 $ 2.2 $ 5.1
======= ======= ======= =======
Publishing Segment
The net revenues and income from operations of the Publishing Segment were as
follows:
Income
Net Revenue from operations
----------- ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1997 1998 1997 1998
------- ------- ------- ------
Penthouse Magazine and
the Affiliate Publications $ 31.9 $ 31.9 $ 5.0 $ 4.3
Foreign edition licensing 1.2 1.1 1.1 0.9
Automotive Magazines 10.6 11.9 2.1 1.5
------- ------- ------- ------
$ 43.7 $ 44.9 $ 8.2 $ 6.7
======= ======= ======= ======
13
<PAGE>
Item 2. (Continued)
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $31.9
million for the six months ended June 30, 1998 and 1997. Newsstand revenue was
$21.1 million and $20.8 million for the six months ended June 30, 1998 and 1997,
respectively, an increase of $0.3 million. The increase in newsstand revenue is
primarily attributable to an increase in the number of newsstand copies sold of
Penthouse magazine. Advertising revenue was $6.3 million and $6.5 million for
the six months ended June 30, 1998 and 1997, respectively, a decrease of $0.2
million. The decline in advertising revenue is primarily attributable to a 27%
decrease in advertising pages sold in the Affiliate Publications during the six
months ended June 30, 1998, compared to the 1997 period. Subscription revenue
was $3.9 million and $3.7 million for the six months ended June 30, 1998 and
1997, respectively, an increase of $0.2 million. This increase is attributable
to an increase in subscription copies sold.
Publishing-production, distribution and editorial expenses were $16.9 million
and $17.9 million for the six months ended June 30, 1998 and 1997, respectively,
a decrease of $1.0 million. Paper costs were $6.3 million for the six months
ended June 30, 1998 and 1997. Print costs were $6.2 million for the six months
ended June 30, 1998, compared to $7.2 million for the six months ended June 30,
1997, a decrease of $1.0 million. The decrease is due to the decrease in the
number of pages per issue and copies printed of certain publications, as well as
reduced printing costs due to the renegotiation of the Company's printing
contracts in the third quarter of 1997. Distribution costs were $2.5 million for
the six months ended June 30, 1998, compared to $2.6 million for the six months
ended June 30, 1997, a decrease of $0.1 million. The decrease is attributable to
a decrease in copies being distributed. Editorial costs were $1.8 million for
the six months ended June 30, 1998 and 1997.
Selling, general and administrative expenses were $10.7 million for the six
months ended June 30, 1998, compared to $8.9 million for the six months ended
June 30, 1997, an increase of $1.8 million. The increase is primarily
attributable to the write off of an uncollectible advertising accounts
receivable of $1.8 million which arose through billings during the six months
ended June 30, 1998. The Company terminated its agreement with an advertising
agency that had an exclusive arrangement to sell audiotext advertising in the
Company's magazines. The Company has entered into a new agreement with another
advertising agency on similar terms to that of the prior agreement. The Company
will experience additional bad debt expense through the third quarter of 1998,
as advertising pages in future issues had been printed prior to termination of
the agreement. The Company expects to be able to return to revenue levels
generated from the previous advertising agency through its new agreement
beginning in the first half of 1999.
Foreign Edition Licensing
Revenues from licensing of foreign editions, which are included in other
revenue, were $1.1 million and $1.2 million for the six months ended June 30,
1998 and 1997, respectively, a decrease of $0.1 million. This decrease is due
primarily to the termination of certain contracts with foreign licensees of
Penthouse magazine.
Selling, general and administrative expenses were $0.2 million and $0.1 million
for the six month period ended June 30, 1998 and 1997, respectively, an increase
of $0.1 million. In 1997, the Company received $0.1 million from a licensee
whose receivable balance was previously written off as a bad debt.
14
<PAGE>
Item 2. (Continued)
Automotive Magazines
Revenues for the Automotive Magazines were $11.9 million and $10.6 million for
the six months ended June 30, 1998 and 1997, respectively, an increase of $1.3
million. Newsstand revenues were $2.6 million and $2.4 million for the six
months ended June 30, 1998 and 1997, respectively, an increase of $0.2 million.
The increase is due primarily to increased cover price of Four Wheeler and Stock
Car magazines. Advertising revenues were $7.2 million and $6.4 million for the
six months ended June 30, 1998 and 1997, respectively, an increase of $0.8
million, resulting from an increase in advertising page rates and pages sold, as
well as advertising revenue of $0.2 million generated from Four Wheeler
Television, which produced its first in a series of 13 cable television shows in
February 1998. Subscription revenues were $2.1 million and $1.8 million for the
six month period ended June 30, 1998 and 1997, respectively, an increase of $0.3
million due to an increase in subscription copies sold.
Publishing-production, distribution and editorial expenses were $5.8 million and
$5.0 million for the six months ended June 30, 1998 and 1997, respectively, an
increase of $0.8 million. Paper costs were $2.3 million and $1.8 million for the
six months ended June 30, 1998 and June 30, 1997, respectively, an increase of
$0.5 million. Paper costs increased due to an increase in magazine copies
printed, increased pages per copy and an increase in the cost of paper. Print
costs were $2.0 million for the six months ended June 30, 1998 and 1997.
Distribution costs were $1.2 million and $1.1 million for the six months ended
June 30, 1998 and 1997, respectively, an increase of $0.1 million, due to the
increase in copies distributed. Editorial costs were $0.2 million for the six
months ended June 30, 1998 and 1997. In 1998, there were $0.2 million in
production costs related to Four Wheeler television.
Selling, general and administrative expenses were $4.4 million and $3.4 million
for the six months ended June 30, 1998 and 1997, respectively, an increase of
$1.0 million. The increase is primarily attributable to subscription acquisition
spending ($0.6 million), increased salaries ($0.1 million) and increased
subscription fulfillment expense ($0.1 million) related to increased
subscription copies distributed during the six months ended June 30, 1998, as
compared to the six months ended June 30, 1997.
Entertainment Segment
Revenues from the Entertainment Segment were $10.8 million for the six months
ended June 30, 1998, compared to $6.7 million for the six months ended June 30,
1997, an increase of $4.1 million. The Company's video business revenues were
$2.0 million for the six months ended June 30, 1998 compared to $1.6 million for
the six months ended June 30, 1997, an increase of $0.4 million. The increase is
due to revenue received from the sale of a videocassette featuring a well know
television personality, revenues received for a pay-per-view joint venture and
increased licensing revenue. Revenues from the Company's pay-per-call business
were $1.6 million and $4.4 million for the six months ended June 30, 1998 and
1997, respectively, a decrease of $2.8 million. Effective January 1, 1998, the
Company engaged a new service bureau to process its pay-per-call business.
Accordingly, revenues for the first half of 1998 were lower due to the
transition and due to the arrangement with its new service bureau whereby the
Company receives a fixed rate per minute, on a net basis. The arrangement with
the Company's previous service bureau paid revenue on a gross basis and the
Company paid certain expenses directly. Under the new agreement these expenses
have been eliminated. The Company's internet business revenues were $7.3 million
and $0.7 million for the six months ended June 30, 1998 and 1997, respectively,
an increase of $6.5 million. Internet revenues increased due to increased
revenues received from the sale of subscriptions to the Company's "Private
Collection", contained within the Company's internet site.
15
<PAGE>
Item 2. (Continued)
Revenues were also received from a new arrangement, whereby the Company receives
a minimum guaranteed revenue from another internet site "linked" to the
Company's internet site. Such arrangement began in April of 1997.
Direct costs were $1.3 million for the six months ended June 30, 1998, compared
to $3.3 million for the six months ended June 30, 1997, a decrease of $2.0
million. The decrease is due primarily to the change in service bureaus
processing the Company's pay-per-call business, as discussed above.
Selling, general and administrative expenses were $3.0 million and $1.6 million
for the six months ended June 30, 1998 and June 30, 1997, respectively, an
increase of $1.4 million. The increase is due primarily to higher computer
processing, personnel and commission expense relating to the internet business
increased revenues.
Corporate Administrative Expense
Corporate administrative expenses includes executive, human resources, finance
and accounting, management information systems and various other expenses.
Corporate administrative expenses were $8.1 million for the six months ended
June 30, 1998, compared to $7.9 million for the six months ended June 30, 1997,
an increase of $0.2 million, due primarily to higher executive compensation.
Rent Expense From Affiliated Companies
Rent expense from affiliated companies represents charges from affiliated
companies for the use of the Company's executive offices. The charge is based
upon the Company's proportionate share of the operating expenses of such
offices. Rent expense from affiliated companies was $0.2 million for the six
months ended June 30, 1998 and 1997.
Impact of Year 2000
The Company is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year.
While neither the comprehensive review nor the implementation plan is as yet
complete and therefore the cost to address the Year 200 problem is not yet
ascertainable, the Company presently believes that the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
such systems have generally been recently implemented or upgraded. As to Year
2000 preparedness of the Company's third party vendors and suppliers, the
Company has prepared and transmitted to them questionnaires, but has as yet not
received responses. A worst case scenario is therefore not yet determinable and
the Company has not made any continency plans.
16
<PAGE>
Item 2. (Continued)
Liquidity and Capital Resources
At June 30, 1998, the Company had $9.0 million in cash and cash equivalents,
compared to $7.3 million at December 31, 1997. The increase in cash and cash
equivalents during the six months ended June 30, 1998 resulted from net cash
flows provided by operating activities of $2.5 million, cash flows used in
investing activities of $0.2 million, and cash flows used in financing
activities of $0.6 million.
Cash flows from operating activities
Net cash provided by operating activities was $2.5 million for the six months
ended June 30, 1998, compared to net cash used in operating activities of $0.9
million for the six months ended June 30, 1997. Net cash provided by operating
activities for the six months ended June 30, 1998 was primarily the result of
income from operations for the period. Net cash used in operating activities
for the six months ended June 30, 1997 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 $0.2 million and
$0.1 million for the six months ended June 30, 1998 and 1997, respectively.
Cash flows from financing activities
Cash flows used in financing activities were $0.6 million for the six months
ended June 30, 1998, compared to cash flows used in financing activities of $0.2
million for the six months ended June 30, 1997. Affiliated company investments
and advances at June 30, 1998 increased $0.1 million from the December 31, 1997
balance, whereby the Company is owed $1.3 million by GMI as of June 30, 1998.
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. On June 30, 1998, the Company received as partial payment of
the amount the outstanding stock of a subsidiary of GMI, whose net assets have
an appraised value of approximately $0.5 million. The net assets of the
subsidiary consist of works of art. Management intends to sell such assets. The
reimbursement by GMI, in the amount of $1.3 million, has not been made by August
14, 1998. Demand for payment has been made in writing. Management of the Company
believes that GMI and its subsidiaries have sufficient assets to enable the
Company to ultimately recover its advance through liquidation of certain of
those assets or through refinancing of GMI's debts. The ability of the Company
to realize repayment of its advance is dependant upon the success of GMI in
refinancing its existing debt obligations which are currently in default. The
principal shareholder of GMI has guaranteed the full amount due to the Company.
At June 30, 1998, the Company has a loan outstanding to the principal
shareholder of GMI of $0.8 million. The loan is evidenced by a promissory note,
bears interest at 13.25% per annum, and is payable on December 31, 1998.
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. In May 1998, the
Company declared and paid a $0.4 million cash dividend to GMI in accordance with
the terms and conditions of the Indenture.
17
<PAGE>
Item 2. (Continued)
Future outlook
The Company's cash balance at June 30, 1998 was $9.0 million, compared to $7.3
million at December 31, 1997. The Company is obligated to make a $4.2 million
interest payment on its Notes on December 31, 1998.
Management believes that it will be able to meet its obligations through the
remainder of 1998 through cash flows from operations and use of its existing
cash balances.
Forward-Looking Statements
In addition to historical information, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements. The forward-looking statements are subject to certain risks and
uncertainties and are based on certain assumptions, including that, as to the
Year 2000 problem, third parties respond fully and accurately to the Company's
inquires, and that, as to the Company's publications, there are no adverse
governmental regulations promulgated, that could cause actual results to differ
materially from those reflected in such forward looking statements. Readers are
cautioned not to place undue reliance in these forward-looking statements, which
reflect management's opinions only as of the date hereof. The Company undertakes
no obligation to revise or publicly release the results of any revision to these
forward looking statements.
Part II-Other Information
Item 1. Legal Proceedings
On January 23,1997, the Company filed in United States District Court for the
Southern District of New York an action (the "Action") under the Racketeer
Influenced and Corrupt Organizations Act ("RICO") alleging, among other things,
that certain defendants conspired to defraud the Company by fraudulently
backdating a contract (the "DEC Contract") which awarded exclusive rights to
develop a "live" Penthouse internet site to defendant Deluxe Entertainment Corp.
("DEC"). On January 24, 1997 DEC served a demand on the Company for arbitration
under the DEC Contract on the issues of breach and damages. The DEC Contract
provides a minimum damage award of $30 million in addition to incidental,
consequential and punitive damages and compensation for lost profits. The
Company moved to enjoin the arbitration and defendant DEC cross-moved to compel
arbitration. By decision dated July 24, 1998, District Court Judge Deborah A.
Batts denied the Company's motion and granted the cross motion compelling
arbitration. The Company intends to vigorously defend the arbitration. In the
event of an adverse outcome, the Company intends to challenge on appeal the
decision compelling arbitration.
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,
1998.
18
<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, 1998 By: /s/ Patrick J. Gavin
---------------------------------------
Signature
Patrick J. Gavin
Executive Vice President-Chief
Operating Officer
(Duly Authorized Officer and
Principal Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
27 Financial Data Schedule
- --------------------------------------------------------------------------------
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL
MEDIA, INC'S JUNE 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,975
<SECURITIES> 0
<RECEIVABLES> 10,586
<ALLOWANCES> 0
<INVENTORY> 5,108
<CURRENT-ASSETS> 30,646
<PP&E> 3,381
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,811
<CURRENT-LIABILITIES> 33,107
<BONDS> 79,556
0
0
<COMMON> 5
<OTHER-SE> (73,783)
<TOTAL-LIABILITY-AND-EQUITY> 44,811
<SALES> 55,740
<TOTAL-REVENUES> 55,740
<CGS> 24,208
<TOTAL-COSTS> 26,202
<OTHER-EXPENSES> 237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,964)
<INCOME-PRETAX> 408
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<NET-INCOME> 408
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</TABLE>
