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 March 31, 1999 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
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
11 Penn Plaza, New York, NY 10001
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(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 May 17, 1999
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Common stock, $.01 par value 475,000
<PAGE>
GENERAL MEDIA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Item 3. Quantitative And Qualitative Disclosures About Market Risk 18
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 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)
Three months ended
March 31,
---------
1998 1999
-------- --------
Net revenues
Publishing
Newsstand $ 12,019 $ 10,244
Advertising 6,334 5,490
Subscription 3,043 2,714
Other 915 673
Entertainment 5,692 3,658
-------- --------
28,003 22,779
-------- --------
Operating costs and expenses
Publishing-production, distribution and editorial 11,548 9,955
Entertainment- direct costs 969 434
Selling, general and administrative 12,625 11,920
Rent expense from affiliated companies 124 133
Depreciation and amortization 457 313
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Total operating costs and expenses 25,723 22,755
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Income from operations 2,280 24
-------- --------
Other income (expense)
Gain on sale of Automotive Group 30,734
Interest expense (2,477) (2,480)
Interest income 119 225
-------- --------
Income before taxes (78) 28,503
Income taxes 1,287
-------- --------
Net income (loss) (78) 27,216
Accumulated deficit-beginning of period (75,214) (79,493)
-------- --------
Accumulated deficit-end of period ($75,292) ($52,277)
======== ========
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, March 31,
1998 1999
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,432 $ 39,440
Accounts receivable, net of allowance
for doubtful accounts 9,083 8,281
Inventories 4,658 4,395
Prepaid expenses and other current assets 3,378 2,464
Due from affiliated companies 2,143 2,426
Loan to shareholder 985 1,011
-------- --------
Total current assets 26,679 58,017
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 3,793 3,474
OTHER ASSETS
Intangible assets, net 2,577
Deferred subscription aquisition costs 3,041 1,251
Deferred debt issuance costs, net 1,998 1,750
Loan to affiliated company 1,086 1,086
Other 2,824 2,548
-------- --------
11,526 6,635
-------- --------
$ 41,998 $ 68,126
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 16,538 $ 14,807
Deferred subscription revenue 11,729 8,052
Deferred internet revenue 1,800 2,100
Other liabilities and accrued expenses 5,426 9,641
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Total current liabilities 35,493 34,600
SENIOR SECURED NOTES 79,645 79,689
UNEARNED REVENUE 3,089 2,900
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 (79,493) (52,277)
-------- --------
(78,070) (50,854)
-------- --------
$ 41,948 $ 68,126
======== ========
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)
Three months ended
March 31,
---------
1998 1999
-------- --------
Cash flows from operating activities
Net income (loss) ($78) $ 27,216
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 457 313
Amortization of debt issuance costs and discounts 292 292
Disposition of Automotive Magazine assets, net of tax (29,447)
Net change in operating assets and liabilities 3,234 56
-------- --------
Net cash provided by (used in) operations 3,905 (1,570)
-------- --------
Cash flows from investing activities
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (88) (113)
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Net cash provided by (used in) investing activities (88) 34,887
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Cash flows from financing activities
Advances to affiliated companies (401) (283)
Loan to shareholder (88) (26)
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Net cash used in financing activities (489) (309)
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Net increase in cash and cash equivalents 3,328 33,008
Cash and cash equivalents at beginning of period 7,308 6,432
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Cash and cash equivalents at end of period (Note 6) $ 10,636 $ 39,440
======== ========
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)
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, 1998 has been derived from the audited
financial statements at that date.
2. Inventories
Inventories consist of the following:
December 31, March 31,
1998 1999
----------- ---------
------ In Thousands ------
Paper and printing $1,807 $1,588
Editorials and pictorial 2,080 2,070
Film and programming costs 771 737
------ ------
$4,658 $4,395
====== ======
3. Management Charge
The Company incurs shared common indirect expenses for the benefit of GMI and
affiliated companies, including accounting, personnel, management information
systems, 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)
4. Senior Secured Notes
On December 21, 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. The Notes can be redeemed at the option of
the Company during the period beginning December 31, 1998 at 104% of the
principal amount of the Notes and beginning December 31, 1999 and thereafter at
100% of the principal amount of the Notes.
The Company also issued 85,000 common stock purchase warrants to the purchasers
of the Notes and sold to the underwriter at a discount 102,000 warrants
("Warrants"). The Warrants entitle the holders to purchase in the aggregate
25,000 shares of the Company's common stock at the exercise price of $0.01 per
share. The Warrants are exercisable for a period of seven years and, beginning
in 1999, the holders have the right to require the Company to purchase for cash
all the Warrants at their fair value. The Company recorded the Warrants at fair
value determined to be $1,841,000. Debt issuance costs, consisting of placement
agent commissions, and professional and underwriters' fees totaling
approximately $7,141,000, are being amortized over seven years.
In July 1995, the Company repurchased $5,000,000 face amount of its outstanding
Senior Secured Notes, including 5,000 warrants, for cash of $4,050,000.
The Notes are secured by a first priority security interest in all intellectual
property rights (including copyrights and trademarks) and substantially all
other intangible and tangible assets of the Company, other than accounts
receivable, inventory and cash equivalents.
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) restricts the
ability of the Company to dispose of assets, incur indebtedness, create liens
and make certain investments, (ii) requires the Company to maintain a minimum
consolidated tangible net worth (deficiency) of $(81.6) million, and (iii)
restricts the Company's ability to pay dividends unless certain financial
performance tests are met. The Company's subsidiaries, which are guarantors of
the Senior Secured Notes under the indenture, however 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 March 31, 1999, the Company was in compliance with all
such covenants.
Reference is made to Note 6 below concerning the offer to purchase $28,000,000
in aggregate principle amount of the Notes.
7
<PAGE>
General Media, Inc. and Subsidiaries
Notes to Condensed Consolidated
Financial Statements (Unaudited)
5. Statement of Cash Flows
Cash payments made for interest during the three months ended March 31, 1999 and
1998 were $60,000 in each such period.
6. Sale of Automotive Magazines
On March 2, 1999 (the "Closing Date"), the Company sold substantially all of the
assets, exclusive of net newsstand and advertising accounts receivable, of its
wholly-owned subsidiary, General Media Automotive Group, Inc. ("GMAG") to EMAP
Petersen, Inc. ("EMAP") for $35 million in cash plus the assumption of certain
liabilities and deferred subscription liabilities, as defined in the Asset Sale
and Purchase Agreement between EMAP and GMAG dated as of February 9, 1999 (the
Asset Purchase Agreement"). There are no material relationships between EMAP and
the Company or any of its affiliates, any director or officer of the Company, or
any associate of any such director or officer. The sale price is subject to an
adjustment which was to be finalized within 60 days from the Closing Date and
shall be increased or decreased on a dollar-for-dollar basis by the amount that
net working capital, as defined in the Asset Purchase Agreement, deviates from
$1.5 million. The Company recorded an after tax gain of approximately $29
million on the sale. A final determination with respect to the sale price
adjustment has not yet been made, although the Company does not expect such
adjustment to be material.
Under the Indenture described in Note 4, the Company has 180 days from the
Closing Date to apply the net proceeds to an investment in another business or
capital expenditure or other tangible or long-term assets in the same or similar
line of business as the Company was engaged in on the date of the Indenture. To
the extent that any net proceeds are not so applied, the remaining amount shall
be deemed excess proceeds. Should the excess proceeds exceed $5 million, the
Company is required to make an offer to all bondholders to purchase the maximum
principal amount of notes plus accrued interest that may be purchased from the
excess proceeds.
On April 27, 1999, the Company tendered an Offer To Purchase and Consent
Solicitation Agreement (the "Offer") to the registered holders (the
"Noteholders") of the Notes. The Offer solicits consents from Noteholders of at
least a majority in outstanding principal amount of the Notes for the adoption
of certain proposed waivers and amendments to the Indenture dated as of December
21, 1993 between the Company and the Trustee, pursuant to which the Notes were
issued.
The Offer solicits the Noteholders consent to the Company's offer to purchase
for cash, on a pro-rata basis, $28,000,000 in aggregate principal amount of the
Notes from the proceeds received from the sale of the Automotive Magazines ( the
"Sales Proceeds") . The purchase price offered is $0.95 for each $1.00 in
principal amount of Notes tendered and accepted pursuant to the Offer, plus
accrued interest through and including the date of purchase. The Offer further
requests the Noteholders to consent to the release to the Company for general
working capital of approximately $2.7 million remaining from the Sales Proceeds,
after giving effect to the purchase of the Notes contemplated in the Offer and
costs associated with sale of the Automotive Magazines. In the event a majority
of the Noteholders consent to the waivers and amendments to the Indenture but
tender less than $28,000,000 in principal amount of Notes for purchase by the
Company, the Sales Proceeds remaining after payment of the tendered Notes
together with accrued interest through and including the payment date, will be
released to the Company for general working capital purposes.
8
<PAGE>
General Media, Inc. and Subsidiaries
Notes to Condensed Consolidated
Financial Statements (Unaudited)
6. (Continued)
The Offer expires on May 17, 1999 unless extended by the Company. If all
conditions to acceptance are satisfied or validly waived, the tendered Notes
will be paid no later than five business days after expiration of the Offer. The
effect of this Offer, if fully subscribed, will be a reduction in Notes
outstanding of $28,000,000, a reduction in interest expense in Fiscal 1999 of
approximately $1.8 million and a reduction in available cash of approximately
$28,000,000.
9
<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 until March 2, 1999, 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, video cassettes, pay-per-view programming, and pay subscription
service on the internet.
Results of Operations (Three Months Ended March 31, 1999 vs. 1998)
The Company's revenues were $22.8 million for the three months ended March 31,
1999, compared to revenues of $28.0 million for the three months ended March 31,
1998, a decrease of $5.2 million. Newsstand revenues were $10.2 million and
$12.0 million for the three months ended March 31, 1999 and 1998, respectively,
a decrease of $1.8 million. Newsstand revenues for Mens Magazines were $9.2 and
$10.7 million for the three months ended March 31, 1999 and 1998, respectively,
a decrease of $1.5 million. Newsstand revenues from the Automotive Magazines
were $1.0 and $1.3 million for the three months ended March 31, 1999 and 1998,
respectively, a decrease of $.3 million. Advertising revenues were $5.5 and $6.3
million for the three months ended March 31, 1999 and 1998, respectively, a
decrease of $.8 million. Advertising revenues from Mens Magazines decreased $0.4
million and advertising revenues from Automotive Magazines decreased $0.4
million during the period. Subscription revenues were $2.7 million and $3.0
million for the three months ended March 31, 1999 and 1998, respectively, a
decrease of $0.3 million. The decrease in subscription revenues is primarily
attributable to a $0.2 million decrease in subscription revenues from Automotive
Magazines. Revenues for the Entertainment Segment were $3.7 million and $5.7
million for the three months ended March 31, 1999 and 1998, respectively, a
decrease of $2.0 million. Revenues from the Company's video business were $0.6
million and $1.2 million for the three months ended March 31, 1999 and 1998,
respectively, a decrease of $0.6 million. Revenues from the Company's
pay-per-call business were $0.4 million and $1.0 million for the three months
ended March 31, 1999 and 1998, respectively, a decrease of $0.6 million.
Revenues from the Company's internet business were $2.7 million and $3.5 million
for the three months ended March 31, 1999 and 1998, respectively, a decrease of
$0.8 million.
Income from operations was $24 thousand for the three months ended March 31,
1999, compared to $2.3 million for the three months ended March 31, 1998. Income
from operations was negatively impacted by decreased revenues, in part due to
the sale of the Automotive Magazines on March 2, 1999, which was partially
offset by a decrease in production, distribution and editorial costs resulting
from a decrease in the copies printed and fewer issues of certain publications,
as well as decreased selling, general and administrative expenses due to the
sale of the Automotive Magazines.
10
<PAGE>
Item 2. (Continued)
Net non-operating income for the three months ended March 31, 1999 was $28.5
million, compared to net non-operating expenses of $2.4 million for the three
months ended March 31, 1998. Included in non-operating income for the three
months ended March 31, 1999 is a before tax gain of $30.7 million from the sale
of the Automotive Magazines (See Note 6). Included in interest expense is the
amortization of debt issuance costs and discounts of $0.3 million for the three
months ended March 31, 1999 and 1998.
Net income for the three months ended March 31, 1999 was $27.2 million, compared
to a net loss of ($0.1) million for the three months ended March 31, 1998, as a
result of the above discussed factors.
The net revenues and income from operations of the Company were as follows (in
millions):
Income
Net Revenue from operations
------------ ---------------
Three Three
Months Ended Months Ended
March 31, March 31,
--------- ---------
1998 1999 1998 1999
---- ---- ---- ----
Publishing Segment $22.3 $19.1 $3.2 $2.4
Entertainment Segment 5.7 3.7 3.2 1.6
----- ----- ---- ----
$28.0 $22.8 $6.4 $4.0
Corporate Administrative Expenses (4.1) (4.0)
----- ----- ---- ----
$28.0 $22.8 $2.3 $0.0
===== ===== ==== ====
Publishing Segment
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Income
Net Revenue from operations
------------ ---------------
Three Three
Months Ended Months Ended
March 31, March 31,
--------- ---------
1998 1999 1998 1999
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $15.8 $13.7 $1.9 $1.3
Foreign edition licensing 0.6 0.5 0.5 0.4
Automotive Magazines 5.9 4.9 0.8 0.7
----- ----- ---- ----
$22.3 $19.1 $3.2 $2.4
===== ===== ==== ====
11
<PAGE>
Item 2. (Continued)
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $13.7
million and $15.8 million for the three months ended March 31, 1999 and 1998,
respectively, a decrease of $2.1 million. Newsstand revenue was $9.2 million and
$10.7 million for the three months ended March 31, 1999 and 1998, respectively,
a decrease of $1.5 million. The decrease is attributable to a $0.4 million
decrease in newsstand revenue from Penthouse magazine, which resulted from a 6%
decrease in the number of newsstand copies sold, primarily due to increased
competition during the period as a result of the issuance of certain celebrity
titles by a competing magazine and a $1.1 million decrease in newsstand revenue
from the Affiliate Publications, which resulted from a decrease of 21% in the
number of newsstand copies sold, partially due to the publication of fewer
issues of Girls of Penthouse and Hot Talk magazines and the suspension of
publication of Penthouse Comix during the 1999 period. Advertising revenue for
Penthouse magazine and the Affiliate Publications was $2.5 million for the three
months ended March 31, 1999, compared to $2.9 million for the three months ended
March 31, 1998, a decrease of $0.4 million. The decline in advertising revenues
is primarily attributable to a decrease in advertising rates per page for
advertising pages sold in Penthouse magazine as well as decreased revenues due
to fewer issues of certain magazines on sale, as noted above, partially offset
by an increase in advertising rates per page and the number of advertising pages
sold per issue in the Affiliate Publications during the three months ended March
31, 1999, as compared to the 1998 period. Subscription revenue was $1.9 million
for the three months ended March 31, 1999, compared to $2.0 million for the
three months ended March 31, 1998, a decrease of $0.1 million due primarily to a
decline in the net revenue per copy, partially offset by a 4% increase in the
number of subscription copies of Penthouse sold and an 8% increase in the number
of subscription copies of the Affiliate Publications sold. The decreased rate
per copy was due primarily to a change in the mix between agency sales (which
generate a low per copy rate) and direct to customer sales.
Publishing-production, distribution and editorial expenses were $7.5 million and
$8.6 million for the three months ended March 31, 1999 and 1998, respectively, a
decrease of $1.1 million. Paper costs were $2.6 million for the three months
ended March 31, 1999, compared to $3.2 million for the three months ended March
31, 1998, a decrease of $0.6 million. Print costs were $2.8 million for the
three months ended March 31, 1999, compared to $3.3 for the three months ended
March 31, 1998, a decrease of $0.5 million. The decrease in paper and print
costs is due primarily to a decrease in the cost of paper, a decrease in copies
printed and fewer issues of certain publications printed, as discussed above,
during the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998. Distribution costs were $1.2 million for the three months
ended March 31, 1999 and 1998. Editorial costs were $0.9 million for the three
months ended March 31, 1999 and 1998.
Selling, general and administrative expenses were $4.9 million for the three
months ended March 31, 1999, compared to $5.3 million for the three months ended
March 31, 1998, a decrease of $0.4 million. The decrease occurred because
expenses during the March 31, 1998 period were inflated due to the write off of
an uncollectible advertising accounts receivable of $1.0 million which arose
through billings during the three months ended March 31, 1998 in connection with
the termination of the Company's agreement with an advertising agency that had
an exclusive arrangement to sell audiotext advertising in the Company's
magazines. The Company entered into a new agreement with another advertising
agency on similar terms to that of the prior agreement. Management believes the
effects of the termination of the advertising agency will have minimal effects
on the results of the Company's future operations.
12
<PAGE>
Item 2. (Continued)
Foreign Edition Licensing
Revenues from licensing of foreign editions, which are included in other
revenue, were $0.5 million and $0.6 million for the three months ended March 31,
1999 and 1998, respectively, a decrease of $0.1 million. The decrease is due
primarily to the termination of certain contracts with foreign licensees of
Penthouse magazine.
Automotive Magazines
Revenues for the Automotive Magazines were $4.9 million and $5.9 million for the
three months ended March 31, 1999 and 1998, respectively, a decrease of $1.0
million. Newsstand revenues were $1.0 million and $1.3 million for the three
months ended March 31, 1999 and March 31, 1998, respectively, a decrease of $0.3
million. The decrease is due primarily to the publication of fewer issues of
Stock Car and Drag Racing during the 1999 period, as a result of the sale of the
Automotive Magazines on March 2, 1999 (See Note 6). Advertising revenues were
$3.0 million and $3.4 million for the three months ended March 31, 1999 and
1998, respectively, a decrease of $0.4 million, which is due primarily to the
publication of fewer issues of certain publications, as noted above, during the
three months ended March 31, 1999, as well as the loss of advertising revenue
from Four Wheeler Television as a result of the sale of the Automotive
Magazines. Subscription revenues were $0.8 million and $1.1 million for the
three month period ended March 31, 1999 and 1998, respectively, a decrease of
$0.3 million. The decrease is due primarily to the publication of fewer issues
of certain publications, as noted above, during the three months ended March 31,
1999.
Publishing-production, distribution and editorial expenses were $2.5 million and
$2.9 million for the three months ended March 31, 1999 and 1998, respectively, a
decrease of $0.4 million. Paper costs were $1.0 million and $1.2 million for the
three months ended March 31, 1999 and 1998, respectively, a decrease of $0.2
million. Print costs were $0.8 million and $1.0 million for the three months
ended March 31, 1999 and 1998, respectively, a decrease of $0.2 million. The
decrease in paper and print costs is due primarily to the publication of fewer
issues of certain publications, as noted above, during the period ended March
31, 1999. Distribution costs were $0.6 million for the three months ended March
31, 1999 and 1998. Editorial costs were $0.1 million for the three months ended
March 31, 1999 and 1998.
Selling, general and administrative expenses were $1.7 million and $2.1 million
for the three months ended March 31, 1999 and 1998, respectively, a decrease of
$0.4 million. The decrease is primarily attributable to a reduction in selling,
general and administrative expenses as a result of the sale of the Automotive
Magazines, as noted above, during the period March 31, 1999.
13
<PAGE>
Item 2. (Continued)
Entertainment Segment
Revenues from the Entertainment Segment were $3.7 million for the three months
ended March 31, 1999, compared to $5.7 million for the three months ended March
31, 1998, a decrease of $2.0 million. The Company's video business revenues were
$0.6 million for the three months ended March 31, 1999, compared to $1.2 million
for the three months ended March 31, 1998, a decrease of $0.6 million. The
decrease is due primarily to a decline in sales through the Company's national
wholesale distributor and to sales in the prior period of a videocassette
featuring a well known television personality. Revenues from the Company's
pay-per-call business were $0.4 million and $1.0 million for the three months
ended March 31, 1999 and 1998, respectively, a decrease of $0.6 million. Staring
on February 1, 1998, the Company began utilizing the services of a new service
bureau to process its pay-per-call business. Revenues for the first quarter of
1999 were lower due to the Company's arrangement with its new service bureau
under which the Company receives a fixed rate per minute. During the month of
January 1998, the Company still utilized the arrangement with the Company's
previous service bureau under which revenue was paid a gross basis and the
Company paid certain expenses directly. The Company's internet business revenues
were $2.7 million and $3.5 million for the three months ended March 31, 1999 and
1998, respectively, a decrease of $0.8 million. The decrease occurred due to a
reduction in revenue of $0.4 million from another internet site "linked" to the
Company's site and a special one-time travel and entertainment promotion that
generated $0.6 million in revenue during the three months ended March 31, 1998,
which was not repeated in the current year. In addition, there was a decrease of
$0.2 million caused by an increase in the reserve for future charge backs from
credit card sales of subscriptions to the Company's internet services and a
deferral to future periods of $0.3 million of revenue from the internet
memberships to more closely match the revenue to the subscription periods.
Direct costs were $0.4 million for the three months ended March 31, 1999,
compared to $0.9 million for the three months ended March 31, 1998, a decrease
of $0.5 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 $1.7 million and $1.6 million
for the three months ended March 31, 1999 and 1998, respectively, an increase of
$0.1 million. The increase is due primarily to higher computer processing,
consulting and personnel expenses relating to the continued development and
expansion of the Company's internet business.
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
March 31, 1999, compared to $4.1 million for the three months ended March 31,
1998, a decrease of $0.1 million. The decrease is due to decreased salary
expense ($0.2 million), decreased rent expense ($0.1 million), decreased
depreciation expense ($0.1 million), partially offset by increased legal and
professional fees ($0.3 million).
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 March 31, 1999 and 1998.
14
<PAGE>
Item 2. (Continued)
Impact of Year 2000
The Company is in the process of reviewing its computer systems and operations
to identify and determine the extent to which any systems will be vulnerable to
potential errors and failures as a result of the "Year 2000" problem. The Year
2000 problem is the result of computer programs being written using two digits,
rather than four digits, to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations, causing disruptions of operations including, among
other things, a temporary inability to process transactions, billing, customer
service or to engage in similar normal business activities.
The Company has conducted a comprehensive review of its computer systems to
ensure that all such systems are, or prior to the end of 1999 will be, Year 2000
compliant. The Company has completed the comprehensive review and is remediating
non-compliant systems it has identified. The Company presently believes that the
Year 2000 problem will not pose significant operational problems for the
Company's computer infrastructure as such systems have generally been recently
implemented or upgraded. Additionally, the Company has taken occupancy of new
corporate office facilities in December of 1998 and technology acquired for that
facility is Year 2000 compliant. The Company's plan for its Year 2000 project
includes the following steps: (i) conducting a comprehensive inventory of the
Company's internal systems, including information technology systems and
non-information technology systems (which include, among other things,
telecommunications and electrical systems) and systems to be acquired by the
Company, (ii) assessing and prioritizing the required remediation, (iii)
remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems and (iv) testing all remediated systems for Year 2000
compliance. The Company has completed steps (i) and (ii).
In addition to assessing its own systems, the Company has sent questionnaires to
its vendors and suppliers, including outside service providers and printers, to
determine their vulnerability to Year 2000 problems and any potential impact on
the Company. The Company has evaluated the responses to these questionnaires.
Based upon written responses already received, the Company believes its national
wholesale magazine distributor and its subscription fulfillment company and all
major printers, vendors and suppliers will be fully compliant by the end of 1999
or that effective contingency plans will be developed or implemented.
The Company expects to complete the remaining steps of the process described
above by September 30, 1999 and further expects that all of its critical
computer systems will be fully Year 2000 compliant before the end of 1999. There
can be no assurance, however, that the Company will achieve full Year 2000
compliance before the end of 1999 or that effective continency plans will be
developed or implemented. A failure of the Company's computer systems or the
Company's vendors or customers to effectively upgrade their software and systems
for the transition to the year 2000 could have a material adverse effect on the
Company's business, financial position and results of operations.
The Company estimates that it will incur costs of between $1.0 million and $1.5
million to become Year 2000 compliance; although the Company's evaluation of the
Year 2000 problem is not yet complete and actual costs may be higher. Costs will
be expensed or capitalized as appropriate, as they are incurred. As of May 1999,
approximately $0.8 million of such costs had already been incurred.
15
<PAGE>
Item 2. (Continued
While the Company has completed its Year 2000 assessment, it has not yet
determined the nature and extent of any continency plans that may be required.
Even if the Company's plan to become Year 2000 compliant is completed and all
systems operated by, or in control of, the Company are properly remediated, the
most reasonable likely worst case scenario would be an external system failure
beyond the control of the Company to remedy. Such a failure could materially
prevent the Company from operating its business. The Company believes that such
a failure would likely lead to lost revenues, increased operating costs, loss of
customers or other business interruptions of a material nature.
Liquidity and Capital Resources
At March 31, 1999, the Company had $39.4 million in cash and cash equivalents,
compared to $6.4 million at December 31, 1998. The increase in cash and cash
equivalents during the three months ended March 31, 1999, resulted from cash
flows provided by investing activities of $34.9 million (the sale of the
Automotive Magazines), partially offset by net cash flows used in operating
activities of $1.6 million and cash flows used in financing activities of $0.3
million.
Cash flows from operating activities
Net cash used in operating activities was $1.6 million for the three months
ended March 31, 1999, compared to net cash provided by operating activities of
$3.9 million for the three months ended March 31, 1998. Net cash used in
operating activities for the three months ended March 31, 1999 was primarily the
result of income from operations for the period and increased deferred revenue
from internet services, offset by decreased accounts payable balances due to the
timing of payments to vendors. Net cash provided by operating activities for the
three months ended March 31, 1998 was primarily the result of income from
operations for the period and increased accounts payable balances due to timing
of payments to vendors.
Cash flows from investing activities
Cash provided by investing activities was $35.0 million for the three months
ended March 31, 1999, compared to net cash used in investing activities of $0.1
million for the three months ended March 31, 1998. Cash provided by investing
activities for the three months ended March 31, 1999 was primarily the result of
the sale of the Automotive Magazines (See Note 6) for $35.0 million, offset by
capital expenditures of $0.1 million. Cash used in investing activities for the
three months ended March 31, 1998 was primarily the result of capital
expenditures of $0.1 million.
Cash flows from financing activities
Cash flows used in financing activities were $0.3 million for the three months
ended March 31, 1999, compared to cash flows used in financing activities of
$0.5 million for the three months ended March 31, 1998. Affiliated company
investments and advances at March 31, 1999 increased $0.3 million from the
December 31, 1998 balance, whereby the Company is owed $2.4 million by GMI as of
March 31, 1999. 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. In June 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 $2.4 million, has not been made by May
14, 1999. Demand for payment has been made in
16
<PAGE>
Item 2. (Continued)
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,
some of which are currently in default. The principal shareholder of GMI has
guaranteed the full amount due to the Company. At March 31, 1999 , the Company
has a loan outstanding to the principal shareholder of GMI of $1.0 million. The
loan is evidenced by a promissory note, bears interest at 11.0% per annum, and
is payable on December 31, 1999.
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.
Future outlook
The Company's revenues decreased for the first three months of 1999 compared to
the same period of the prior year. However the Company's results from operations
were positively impacted by the sale of the Automotive Magazines which resulted
in net income to the Company in the first three months of 1999 (See Note 6 to
Condensed Consolidated Financial Statements). While it is difficult to predict
future results of operations, it is unlikely that the Company can achieve net
income for the balance of 1999 from continuing operations. The Company continues
to invest in and expand its internet service, and expects the entertainment
segment to grow despite the decrease experienced in the first three months of
1999 when compared to the prior period. Revenue from the internet service, as
discussed above, decreased as a result of a reduction in revenue of $0.4 million
from another internet site "linked" to the Company's site and due to a special
one-time travel and entertainment promotion that generated $0.6 million in
revenue during the three months ended March 31, 1998, which was not repeated in
the current year. In additional, there was a decrease of $0.2 million as a
result of an increase in the reserve for future charge backs from credit card
sales of subscriptions to the Company's internet services and a deferral to
future periods of $0.3 million of revenue from the internet memberships to more
closely match the revenue to the subscription periods. However, the Company
expects the growth of its core internet business to offset the effect of these
negative factors by the end of the year and provide for growth in the future.
The Company has a $4.3 million semiannual interest payment due on June 30, 1999
and December 31, 1999, subject to a decrease of approximately $0.3 million at
June 30, 1999 and $1.5 million at December 31, 1999 pending successful purchase
of outstanding notes as discussed in Note 6 to the Condensed Consolidated
Financial Statements. Management of the Company believes that it will have
sufficient cash resources through positive cash flows from operations and use of
its existing cash balances to enable it to meet its obligations over the next
twelve months.
17
<PAGE>
Item 2. (Continued)
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.
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in interest rates. Management
does not believe that it has any foreign currency rate risk.
Interest Rates-As of March 31, 1999, the Company had debt of $79.7 million with
a fixed rate of 10 5/8%. The Company is subject to market risk based on
potential fluctuations in current interest rates.
Foreign-Exchange Rate Risk-The Company does not believe it has exposure to
foreign exchange rate risk because all of its financial instruments are
denominated in U.S. dollars.
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 Men's Adventure Comix. By decision dated December 2, 1998,
United States District Court Judge Michael B. Mukassey dismissed the plaintiffs'
federal claims. The plaintiffs' have indicated their intention to file a similar
claim in New York State Courts. 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.
On March 17, 1999, the Company filed a report on Form 8-K,
concerning the sale of the Company's wholly-owned subsidiary,
General Media Automotive Group, Inc. to EMAP Petersen, Inc.
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: May 17, 1999 By: /s/ John D. Orlando
-----------------------------
Signature
John D. Orlando
Senior Vice President-Chief Financial
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 March 31, 1999 Form 10Q and is qualified in its' entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 39,440
<SECURITIES> 0
<RECEIVABLES> 8,281
<ALLOWANCES> 0
<INVENTORY> 4,395
<CURRENT-ASSETS> 58,017
<PP&E> 3,474
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,126
<CURRENT-LIABILITIES> 34,600
<BONDS> 79,689
0
0
<COMMON> 5
<OTHER-SE> (50,859)
<TOTAL-LIABILITY-AND-EQUITY> 68,126
<SALES> 22,779
<TOTAL-REVENUES> 22,779
<CGS> 10,389
<TOTAL-COSTS> 12,233
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,480)
<INCOME-PRETAX> 28,503
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 27,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,216
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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