SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
of the Securities Exchange Act of 1934
Commission
For the Quarterly Period Ended September 30, 1999 File No. 33-76716
General Media, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3750988
- --------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
11 Penn Plaza, New York, NY 10001
- ------------------------------- --------
(Address of Principal Executive Zip Code
Offices)
(212) 702-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 15, 1999
----- --------------------------------
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 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 22
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 22
Signatures 23
Exhibit Index 24
2
<PAGE>
Item 1. Financial Statements
General Media, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues
Publishing
Newsstand $ 35,049 $ 28,406 $ 11,389 $ 9,282
Advertising 19,907 10,208 $ 6,456 $ 2,633
Subscription 9,020 6,026 $ 3,018 $ 1,596
Other 2,551 2,118 $ 745 $ 709
$ 0
Entertainment 15,136 12,544 $ 4,315 $ 4,598
-------- -------- -------- --------
81,663 59,302 25,923 18,818
-------- -------- -------- --------
Operating costs and expenses
Publishing-production, distribution and editorial 33,774 25,725 11,039 8,831
Entertainment- direct costs 2,043 1,512 570 564
Selling, general and administrative 38,295 30,710 13,008 9,752
Rent expense from affiliated companies 400 361 163 120
Depreciation and amortization 1,374 728 459 217
-------- -------- -------- --------
Total operating costs and expenses 75,886 59,036 25,239 19,484
-------- -------- -------- --------
Income (loss) from operations 5,777 266 684 (666)
-------- -------- -------- --------
Other income (expense)
Gain on sale of Automotive Group 30,734
Interest expense (7,441) (6,277) (2,477) (1,689)
Interest income 386 643 107 105
-------- -------- -------- --------
Income (loss) before taxes (1,278) 25,366 (1,686) (2,250)
Income taxes 1,287
-------- -------- -------- --------
Net income (loss) before extraordinary item (1,278) 24,079 (1,686) (2,250)
Extraordinary gain from early extinguishment of debt,
net of income taxes of $50,000 in 1999 (Notes 4 & 6) 641
-------- -------- -------- --------
Net income (loss) (1,278) 24,720 (1,686) (2,250)
Accumulated deficit-beginning of period (75,214) (79,493) (75,206) (52,523)
-------- -------- -------- --------
Less: Cash dividend paid (400)
-------- -------- -------- --------
Accumulated deficit-end of period ($76,892) ($54,773) ($76,892) ($54,773)
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,432 $ 7,683
Accounts receivable, net of allowance
for doubtful accounts 9,083 6,728
Inventories 4,658 4,795
Prepaid expenses and other current assets 3,378 1,842
Due from affiliated companies 2,143 2,446
Loan to shareholder 985 1,036
-------- --------
Total current assets 26,679 24,530
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 3,743 3,383
OTHER ASSETS
Intangible assets, net 2,577
Deferred subscription aquisition costs 3,041 480
Deferred debt issuance costs, net 1,998 900
Loan to affiliated company 1,086 1,086
Other 2,824 2,428
-------- --------
11,526 4,894
-------- --------
$ 41,948 $ 32,807
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 16,538 $ 12,331
Deferred subscription revenue 11,729 6,483
Deferred internet revenue 1,800 2,350
Other liabilities and accrued expenses 5,426 9,091
-------- --------
Total current liabilities 35,493 30,255
SENIOR SECURED NOTES 79,645 51,809
UNEARNED REVENUE 3,089 2,302
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) (54,773)
-------- --------
(78,070) (53,350)
-------- --------
$ 41,948 $ 32,807
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
1998 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income / (loss) ($ 1,278) $ 24,720
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 1,374 728
Extraordinary gain from early extinguishment of debt (641)
Amortization of debt issuance costs and discounts 877 753
Disposition of Automotive Magazine assets, net of tax (29,447)
Net change in operating assets and liabilities (231) (2,472)
-------- --------
Net cash provided by (used in) operations 742 (6,359)
-------- --------
Cash flows from investing activities
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (709) (436)
-------- --------
Net cash provided by (used in) investing activities (709) 34,564
-------- --------
Cash flows from financing activities
Repurchase of Senior Secured Notes (26,600)
Advances to affiliated companies (955) (1,859)
Loan to shareholder (136) (51)
Repayment by affiliated companies 470 1,556
Dividends paid (400) 0
-------- --------
Net cash used in financing activities (1,021) (26,954)
-------- --------
Net increase in cash and cash equivalents (988) 1,251
Cash and cash equivalents at beginning of period 7,308 6,432
-------- --------
Cash and cash equivalents at end of period (Note 6) $ 6,320 $ 7,683
======== ========
</TABLE>
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, September 30,
1998 1999
------------ -------------
-------- In Thousands --------
Paper and printing $1,807 $1,732
Editorials and pictorial 2,080 2,288
Film and programming costs 771 775
------ ------
$4,658 $4,795
====== ======
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
Notes, including 5,000 warrants, for cash of $4,050,000. As more fully described
in Note 6, in May 1999, the Company repurchased $28,000,000 face amount of its
outstanding Notes for cash of $26,600,000.
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 that, 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), as defined, 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 September 30, 1999, the Company was in
compliance with all such covenants.
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 nine months ended September 30, 1999
and 1998 were $4.1 million and $4.4 million, respectively.
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 had 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 were not so applied, the remaining amount was
to be deemed excess proceeds. Should the excess proceeds have exceeded $5
million, the Company was 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 solicited consents from Noteholders for
the adoption of certain proposed waivers and amendments to the Indenture, and
solicited 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 was $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 requested
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 May 1999 a majority of the
Noteholders consented to the waivers and amendments to the Indenture and
tendered the full $28,000,000 in principal amount of Notes for purchase by the
Company for cash of $26,600,000. The remaining cash of approximately $2.7
million was 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 effect of this Offer was a reduction in Notes outstanding of $28,000,000, a
reduction in interest expense in Fiscal 1999 of approximately $1,800,000, a net
gain of $641,000 on the retirement of the Notes and a reduction in available
cash of approximately $28,000,000. The net gain of $641,000 has been reflected
in the Consolidated Statements of Operations as an extraordinary item.
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 from 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 indicative 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 Automotive Magazines were sold on March 2,
1999. 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 paid membership fees to the
Penthouse internet site.
Results of Operations (Three Months Ended September 30, 1999 vs. 1998)
The Company's revenues were $18.8 million for the three months ended September
30, 1999, compared to revenues of $25.9 million for the three months ended
September 30, 1998, a decrease of $7.1 million. Of this decrease, $5.6 million
is attributable to the loss of revenue from the sale of the Automotive Magazines
that were sold in the first quarter of 1999. Newsstand revenues were $9.3
million and $11.4 million for the three months ended September 30, 1999 and
1998, respectively, a decrease of $2.1 million. The Automotive Magazines
accounted for $1.2 million of this decrease. Newsstand revenues for Mens
Magazines were $9.3 and $10.2 million for the three months ended September 30,
1999 and 1998, respectively, a decrease of $0.9 million. Advertising revenues
were $2.6 and $6.5 million for the three months ended September 30, 1999 and
1998, respectively, a decrease of $3.9 million. Of this decrease, $3.4 million
is attributable to the loss of advertising revenue from the sale of the
Automotive Magazines. Advertising revenues from Mens Magazines decreased $0.5
million. Subscription revenues were $1.6 million and $3.0 million for the three
months ended September 30, 1999 and 1998, respectively, a decrease of $1.4
million. The decrease in subscription revenues is primarily attributable to a
$1.1 million decrease in subscription revenues from Automotive Magazines and a
$0.3 million decrease in subscription revenues from the Mens Magazines. Revenues
for the Entertainment Segment were $4.6 million and $4.3 million for the three
months ended September 30, 1999 and 1998, respectively, an increase of $0.3
million. Revenues from the Company's video business were $0.9 million and $0.7
million for the three months ended September 30, 1999 and 1998, respectively, an
increase of $0.2 million. Revenues from the Company's pay-per-call business were
$0.4 million and $0.5 million for the three months ended September 30, 1999 and
1998, respectively, a decrease of $0.1 million. Revenues from the Company's
internet business were $3.3 million and $3.1 million for the three months ended
September 30, 1999 and 1998, respectively, an increase of $0.2 million.
Loss from operations was $0.7 million for the three months ended September 30,
1999, compared to income of $0.7 million for the three months ended September
30, 1998. Income from operations was negatively impacted by decreased revenues,
primarily due to the sale of the Automotive Magazines on March 2, 1999, to the
adverse impact of the continuing consolidation in the domestic single copy
magazine distribution system which
10
<PAGE>
Item 2. (Continued)
caused circulation of Penthouse magazine and the Affiliate Publications to
decrease and to extra production, distribution and editorial costs due to the
publication of a special 30th Anniversary issue of Penthouse magazine which was
a larger than the normal Penthouse issue, partially offset by decreased selling,
general and administrative expenses due to the sale of the Automotive Magazines.
Net non-operating expense was $1.6 million for the three months ended September
30, 1999, compared to net non-operating expenses of $2.4 million for the three
months ended September 30, 1998, a decrease of $0.8 million, which was wholly
attributable to a reduction in interest expense due to a reduction in debt.
Included in interest expense is the amortization of debt issuance costs and
discounts of $0.2 million for the three months ended September 30, 1999,
compared to $0.3 million for the three months ended September 30, 1998.
Net loss for the three months ended September 30, 1999 was $2.3 million,
compared to net loss of $1.7 million for the three months ended September 30,
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 (Loss)
Net Revenue From Operations
----------- ---------------
Three Three
Months Ended Months Ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
----- ----- ----- -----
Publishing Segment $21.6 $14.2 $ 3.2 $ 0.4
Entertainment Segment 4.3 4.6 2.2 2.7
----- ----- ----- -----
$25.9 $18.8 $ 5.4 $ 3.1
Corporate Administrative Expenses (4.7) (3.8)
----- ----- ----- -----
$25.9 $18.8 $ 0.7 $(0.7)
===== ===== ===== =====
Publishing Segment
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Income (Loss)
Net Revenues From Operations
------------ ---------------
Three Three
Months Ended Months Ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $15.5 $13.7 $2.2 $0.0
Foreign edition licensing 0.5 0.5 0.4 0.4
Automotive Magazines 5.6 -- 0.6 --
----- ----- ---- ----
$21.6 $14.2 $3.2 $0.4
===== ===== ==== ====
11
<PAGE>
Item 2. (Continued)
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $13.7
million and $15.5 million for the three months ended September 30, 1999 and
1998, respectively, a decrease of $1.8 million. Newsstand revenue was $9.3
million and $10.2 million for the three months ended September 30, 1999 and
1998, respectively, a decrease of $0.9 million. The decrease is attributable to
a $0.1 million decrease in newsstand revenue from Penthouse magazine, which
resulted from a 5% decrease in the number of newsstand copies sold and a $0.8
million decrease in newsstand revenue from the Affiliate Publications, which
resulted from a decrease of 19% in the number of newsstand copies sold. These
decreases were primarily due to the adverse impact of the continuing
consolidation in the domestic single copy magazine distribution system which
caused circulation of Penthouse and the Affiliate Publications to decrease and
to the publication of fewer issues of Girls of Penthouse magazine during the
third quarter of 1999. Advertising revenue for Penthouse magazine and the
Affiliate Publications was $2.6 million and $3.1 million, for the three months
ended September 30, 1999 and 1998, respectively, a decrease of $0.5 million. The
decrease in advertising revenues is primarily attributable to a decrease in the
number of pay-per-call ad pages sold in Penthouse and the Affiliate Publications
during the three months ended September 30, 1999. The advertising rate for
sexually oriented products and services, such as pay-per-call services, is
higher than for other advertisers, and therefore the decrease in pay-per-call ad
pages sold resulted in a decrease in the average rate per page for advertising
pages sold in Penthouse magazine. This decrease was partially offset by an
increase in the average rate per page for advertising pages sold in the
Affiliate Publications. The advertisements in the Affiliate Publications are
virtually all for sexually oriented products and services and consequently there
was no adverse change associated with the mix of advertisers in these magazines.
Subscription revenue was $1.6 million for the three months ended September 30,
1999, compared to $1.9 million for the three months ended September 30, 1998, a
decrease of $0.3 million due primarily to a 12% decrease in the number of
subsciption copies of Penthouse sold and a decline in the net revenue per copy
of Penthouse sold. The decreased revenue per copy was due primarily to a change
in the mix between agency sales (which generate low revenue per copy) and direct
to customer sales. There was no variance in the number of subscription copies or
in the net revenue per copy of the Affiliate Publications sold.
Publishing-production, distribution and editorial expenses were $8.8 million and
$8.2 million for the three months ended September 30, 1999 and 1998,
respectively, an increase of $0.6 million. Paper costs were $3.3 million for the
three months ended September 30, 1999, compared to $3.2 million for the three
months ended September 30, 1998, an increase of $0.1 million. The increase in
paper costs is due primarily to an increase in the number of pages printed as a
result of the publication of a special 30th Anniversary (September 1999) issue
of Penthouse magazine which was a larger size than the normal Penthouse issue,
offset by a decrease in the copies printed of the other Penthouse issues and of
the Affiliate Publications printed during the three months ended September 30,
1999, as compared to the three months ended September 30, 1998. Print costs were
$3.1 million for the three months ended September 30, 1999 and 1998.
Distribution costs were $1.3 million for the three months ended September 30,
1999, compared to $1.2 million for the three months ended September 30, 1998, an
increase of $0.1 million. Editorial costs were $1.0 million for the three months
ended September 30, 1999, compared to $0.8 million for the three months ended
September 30, 1998, an increase of $0.2 million.
12
<PAGE>
Item 2. (Continued)
Selling, general and administrative expenses were $4.8 million for the three
months ended September 30, 1999 compared to $5.1 million for the three months
ended September 30, 1998, a decrease of $0.3 million. The decrease occurred
primarily because expenses during the September 30, 1998 period were increased
due to the write off of an uncollectible advertising account receivable of $0.3
million which arose in connection with the termination of the Company's
agreement with an advertising agency that had an exclusive arrangement to sell
pay-per-call advertising in the Company's magazines.
Foreign Edition Licensing
Revenues from licensing of foreign editions, which are included in other
revenue, were $0.5 million for both the three months ended September 30, 1999
and 1998. Selling, general and administrative expenses were $0.1 million for
both the three months ended September 30, 1999 and 1998.
Automotive Magazines
On March 2, 1999, the Company sold substantially all the assets, exclusive of
net newsstand and advertising accounts receivable, of its wholly owned
subsidiary, General Media Automotive Group, Inc. to EMAP Petersen, Inc. (See
Note 6 of the Notes to Condensed Consolidated Financial Statements). As a result
there were no significant revenues or expenses for the Automotive Magazines
during the three months ended September 30, 1999. Revenues for the Automotive
Magazines were $5.6 million for the three months ended September 30, 1998.
Entertainment Segment
Revenues from the Entertainment Segment were $4.6 million for the three months
ended September 30, 1999, compared to $4.3 million for the three months ended
September 30, 1998, an increase of $0.3 million. The Company's video business
revenues were $0.9 million for the three months ended September 30, 1999
compared to $0.7 million for the three months ended September 30, 1998, an
increase of $0.2 million. The increase is due to an increase in international
licensing revenue and an increase in pay-per-view television sales in the
current period. Revenues from the Company's pay-per-call business were $0.4
million and $0.5 million for the three months ended September 30, 1999 and 1998,
respectively, a decrease of $0.1 million. Revenues for the third quarter of 1999
were lower due to a decline in billable minutes and an increase in credit card
chargebacks at the Company's smaller service bureaus. The Company's internet
business revenues were $3.3 million and $3.1 million for the three months ended
September 30, 1999 and 1998, respectively, an increase of $0.2 million. The
increase was primarily due to increased revenue from various third party content
providers which have sites linked to the Company's site and a decrease in
customer chargebacks and refunds due to improvements in the Company's internal
credit card processing software and procedures, partially offset by 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 $0.6 million for the three months ended September 30, 1999,
compared to $0.5 million for the three months ended September 30, 1998, an
increase of $0.1 million. The increase is due to commissions and fees paid to
third party internet content providers.
13
<PAGE>
Item 2. (Continued)
Selling, general and administrative expenses were $1.3 million and $1.6 million
for the three months ended September 30, 1999 and September 30, 1998,
respectively, a decrease of $0.3 million. The decrease is due to a decrease in
programming expenses related to the Company's internet business, a decrease in
consulting expenses related to the Company's pay-per-call business and decreased
salary and benefit costs due to a reduction in the number of employees working
in the Company's video business.
Corporate Administrative Expenses
Corporate administrative expenses include executive, human resources, finance
and accounting, management information systems and various other expenses.
Corporate administrative expenses were $3.8 million for the three months ended
September 30, 1999, compared to $4.7 million for the three months ended
September 30, 1998, a decrease of $0.9 million. The decrease is due primarily to
lower salary expense as a result of corporate downsizing ($0.8 million),
decreased depreciation expense ($0.2 million) and lower rent expense ($0.2
million), partially offset by higher legal expenses ($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 September 30, 1999, compared to $0.2 million for the three months
ended September 30, 1998, a decrease of $0.1 million.
Results of Operations (Nine Months Ended September 30, 1999 vs. 1998)
The Company's revenues were $59.3 million for the nine months ended September
30, 1999, compared to revenues of $81.7 million for the nine months ended
September 30, 1998, a decrease of $22.4 million. Of this decrease, $12.6 million
is attributable to the sale of the Automotive Magazines in the first quarter of
1999. Newsstand revenues were $28.4 million and $35.0 million for the nine
months ended September 30, 1999 and 1998, respectively, a decrease of $6.6
million. The sale of the Automotive Magazines accounted for $2.7 million of this
decrease. Newsstand revenues for Mens Magazines were $27.4 and $31.4 million for
the nine months ended September 30, 1999 and 1998, respectively, a decrease of
$4.0 million. Advertising revenues were $10.2 and $19.9 million for the nine
months ended September 30, 1999 and 1998, respectively, a decrease of $9.7
million. Of this amount, $7.5 million is attributable to a loss of advertising
revenue from the sale of the Automotive Magazines. Advertising revenues from
Mens Magazines decreased $2.2 million. Subscription revenues were $6.0 million
and $9.0 million for the nine months ended September 30, 1999 and 1998,
respectively, a decrease of $3.0 million. Of this decrease, $2.3 million is
attributable to the sale of the Automotive Magazines and $0.7 million is
attributable to a decline in subscription revenues from the Mens Magazines.
Revenues for the Entertainment Segment were $12.5 million and $15.1 million for
the nine months ended September 30, 1999 and 1998, respectively, a decrease of
$2.6 million. Revenues from the Company's video business were $2.1 million and
$2.7 million for the nine months ended September 30, 1999 and 1998,
respectively, a decrease of $0.6 million. Revenues from the Company's
pay-per-call business were $1.1 million and $2.1 million for the nine months
ended September 30, 1999 and 1998, respectively, a decrease of $1.0
14
<PAGE>
Item 2. (Continued)
million. Revenues from the Company's internet business were $9.3 million and
$10.3 million for the nine months ended September 30, 1999 and 1998,
respectively, a decrease of $1.0 million.
Income from operations was $0.3 million for the nine months ended September 30,
1999, compared to $5.8 million for the nine months ended September 30, 1998.
Income from operations was negatively impacted by decreased revenues, primarily
due to the sale of the Automotive Magazines on March 2, 1999 and to the adverse
impact of the continuing consolidation in the domestic single copy magazine
distribution system which caused circulation of Penthouse and the Affiliate
Publications to decrease, 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.
Net non-operating income for the nine months ended September 30, 1999 was $25.1
million, compared to net non-operating expenses of $7.1 million for the nine
months ended September 30, 1998. Included in non-operating income for the nine
months ended September 30, 1999 is a before tax gain of $30.7 million from the
sale of the Automotive Magazines (See Note 6 of the Notes to Condensed
Consolidated Financial Statements). Included in interest expense is the
amortization of debt issuance costs and discounts of $0.8 million for the nine
months ended September 30, 1999, compared to $0.9 million for the nine months
ended September 30, 1998.
Net income for the nine months ended September 30, 1999 was $24.7 million,
compared to a net loss of $1.3 million for the nine months ended September 30,
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
----------- ---------------
Nine Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
Publishing Segment $66.5 $46.8 $ 9.8 $ 4.5
Entertainment Segment 15.2 12.5 8.7 6.5
----- ----- ------ ------
$81.7 $59.3 $ 18.5 $ 11.0
Corporate Administrative Expenses (12.7) (10.7)
----- ----- ------ ------
$81.7 $59.3 $ 5.8 $ 0.3
===== ===== ====== ======
15
<PAGE>
Item 2. (Continued)
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Publishing Segment
Income
Net Revenues From Operations
------------ ---------------
Nine Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $47.4 $40.4 $ 6.4 $ 2.8
Foreign edition licensing 1.6 1.5 1.3 1.2
Automotive Magazines 17.5 4.9 2.1 0.5
----- ----- ----- -----
$66.5 $46.8 $ 9.8 $ 4.5
===== ===== ===== =====
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $40.4
million and $47.4 million for the nine months ended September 30, 1999 and 1998,
respectively, a decrease of $7.1 million. Newsstand revenue was $27.4 million
and $31.4 million for the nine months ended September 30, 1999 and 1998,
respectively, a decrease of $4.0 million. The decrease is attributable to a $1.0
million decrease in newsstand revenue from Penthouse magazine, which resulted
from a 5% decrease in the number of newsstand copies sold and a $3.0 million
decrease in newsstand revenue from the Affiliate Publications, which resulted
from a decrease of 21% in the number of newsstand copies sold. These decreases
were primarily due to the adverse impact of the continuing consolidation in the
domestic single copy magazine distribution system which caused circulation of
Penthouse and the Affiliate Publications to decrease, to the publication of
fewer issues of Girls of Penthouse and Hot Talk magazines and the suspension of
publication of Penthouse Comix during the second half of 1998. Advertising
revenue for Penthouse magazine and the Affiliate Publications was $7.2 million
for the nine months ended September 30, 1999, compared to $9.4 million for the
nine months ended September 30, 1998, a decrease of $2.2 million. The decrease
in advertising revenues is primarily attributable to a decrease in the number of
pay-per-call ad pages sold in Penthouse and the Affiliate Publications during
the nine months ended September 30, 1999, as well as decreased revenues due to
fewer issues of certain magazines on sale, as noted above,. The advertising rate
for sexually oriented products and services, such as pay-per-call services, is
higher than for other advertisers, therefore the decrease in pay-per-call ad
pages sold resulted in a decrease in the average rate per page for advertising
pages sold in Penthouse magazine. This decrease was partially offset by an
increase in the average rate per page for advertising pages sold in the
Affiliate Publications. The advertisements in the Affiliate Publications are
virtually all for sexually oriented products and services and consequently there
was no adverse change associated with the mix of advertisers in these magazines.
Subscription revenue was $5.2 million for the nine months ended September 30,
1999, compared to $5.9 million for the nine months ended September 30, 1998, a
decrease of $0.7 million due primarily to a 5% decline in the number of
subscription copies sold of Penthouse and a decline in the net revenue per copy
of Penthouse sold, partially offset by a 3% increase in the number of
subscription copies of the Affiliate Publications sold. The decreased revenue
per copy was due primarily to a change in the mix between agency sales (which
generate a low revenue per copy) and direct to customer sales.
16
<PAGE>
Item 2. (Continued)
Publishing-production, distribution and editorial expenses were $23.2 million
and $25.1 million for the nine months ended September 30, 1999 and 1998,
respectively, a decrease of $1.9 million. Paper costs were $8.6 million for the
nine months ended September 30, 1999, compared to $9.5 million for the nine
months ended September 30, 1998, a decrease of $0.9 million. Print costs were
$8.5 million for the nine months ended September 30, 1999, compared to $9.3 for
the nine months ended September 30, 1998, a decrease of $0.8 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 nine months ended September 30, 1999,
compared to the nine months ended September 30, 1998, partially offset by an
increase in the number of pages printed as a result of the publication of a
special 30th Anniversary (September 1999) issue of Penthouse magazine which was
larger than the normal Penthouse issue. Distribution costs were $3.6 million for
the nine months ended September 30, 1999, compared to $3.7 million for the nine
months ended September 30, 1998. Editorial costs were $2.6 million for the nine
months ended September 30, 1999, and 1998 respectively.
Selling, general and administrative expenses were $14.2 million for the nine
months ended September 30, 1999, compared to $15.8 million for the nine months
ended September 30, 1998, a decrease of $1.6 million. The decrease occurred
because expenses during the September 30, 1998 period were increased due to the
write off of an uncollectible advertising account receivable of $2.4 million
which arose in connection with the termination of the Company's agreement with
an advertising agency that had an exclusive arrangement to sell pay-per-call
advertising in the Company's magazines.
Foreign Edition Licensing
Revenues from licensing of foreign editions, which are included in other
revenue, were $1.5 million and $1.6 million for the nine months ended September
30, 1999 and 1998, 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 $0.3 million for both nine
month periods ended September 30, 1999 and 1998.
Automotive Magazines
Revenues for the Automotive Magazines were $4.9 million and $17.5 million for
the nine months ended September 30, 1999 and 1998, respectively, a decrease of
$12.6 million. This decrease resulted from the sale of the Automotive Magazines
on March 2, 1999 (See Note 6 of the Notes to Condensed Consolidated Financial
Statements).
Entertainment Segment
Revenues from the Entertainment Segment were $12.5 million for the nine months
ended September 30, 1999, compared to $15.2 million for the nine months ended
September 30, 1998, a decrease of $2.7 million. The Company's video business
revenues were $2.1 million for the nine months ended September 30, 1999,
compared to $2.7 million for the nine months ended September 30, 1998, a
decrease of $0.6 million. The decrease is due 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 know television personality. Revenues from the
Company's pay-per-call business were $1.1 million and $2.1 million for the nine
months ended September 30, 1999 and 1998, respectively, a
17
<PAGE>
Item 2. (Continued)
decrease of $1.0 million. Commencing February 1, 1998, the Company engaged a new
service bureau to process its main pay-per-call business. Revenues for the first
nine months of 1999 were lower in part due to the transition to the new service
bureau, whereby the Company receives a fixed rate per minute, on a net basis and
also in part due to a decline in billable minutes and an increase in credit card
chargebacks at the Company's smaller service bureaus. The Company's internet
business revenues were $9.3 million and $10.3 million for the nine months ended
September 30, 1999 and 1998, respectively, a decrease of $1.0 million. The
decrease occurred due to a reduction in revenue of $0.7 million from another
live internet site linked to the Company's site, 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 $0.6 million of revenue from the internet memberships to more
closely match the revenue to the subscription periods, partially offset by a
$0.5 million increase in revenue from third party content providers linked to
the Company's site..
Direct costs were $1.5 million for the nine months ended September 30, 1999,
compared to $1.7 million for the nine months ended September 30, 1998, a
decrease of $0.2 million. Direct costs decreased by $0.4 million due to the
change in service bureaus processing the Company's pay-per-call business, as
discussed above, and direct video costs decreased by $0.3 million due to lower
production, distribution and fulfillment costs as a result of lower sales
volume. These decreases were partially offset by an increase of $0.4 million in
commissions and fees paid to third party internet content providers as a result
of increased revenue from sites linked to the Company's internet site.
Selling, general and administrative expenses were $4.6 million and $4.7 million
for the nine months ended September 30, 1999 and 1998, respectively, a decrease
of $0.1 million. The decrease is due to lower consulting and personnel expenses
related to the Company's pay-per-call and video businesses of approximately $0.5
million, offset by increased expenses of approximately $0.4 million for the
acquisition of video feeds, increased Website hosting and bandwidth charges, and
increased consulting fees associated with the expansion of the Penthouse
internet site.
Corporate Administrative Expenses
Corporate administrative expenses include executive, human resources, finance
and accounting, management information systems and various other expenses.
Corporate administrative expenses were $10.7 million for the nine months ended
September 30, 1999, compared to $12.8 million for the nine months ended
September 30, 1998, a decrease of $2.1 million. The decrease is due to decreased
salary expense ($1.1 million), decreased rent expense ($0.4 million) and
decreased depreciation expense ($0.6 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 $0.4 million for both the
nine months ended September 30, 1999 and 1998.
Impact of Year 2000
The Company has reviewed 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
18
<PAGE>
Item 2. (Continued)
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 are being 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).
The Company had planned to complete the steps described above by October 31,
1999, however a delay in obtaining delivery of an upgrade to its financial
applications computer hardware has caused it to miss that deadline. The
equipment has now been delivered to the Company and a new deadline of December
1, 1999 has been set for completing the remaining steps. The Company expects
that all of its critical computer systems will be fully Year 2000 compliant
before the end of 1999.
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, 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.
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 $1.1 million and $1.5
million to become Year 2000 compliant. Costs will be expensed or capitalized as
appropriate, as they are incurred. As of October 31, 1999, approximately $1.0
million of such costs had already been incurred.
The Company has completed its Year 2000 review and believes its systems will be
Year 2000 compliant so it has not developed a comprehensive contingency plan.
The most reasonable likely worst case scenario related to the Year 2000 problem
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
19
<PAGE>
Item 2. (Continued)
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 September 30, 1999, the Company had $7.7 million in cash and cash
equivalents, compared to $6.4 million at December 31, 1998. The increase in cash
and cash equivalents during the nine months ended September 30, 1999 resulted
from cash flows provided by investing activities of $34.6 million (the sale of
the Automotive Magazines), partially offset by net cash flows used in operating
activities of $6.4 million and cash flows used in financing activities of $27.0
million (the repurchase of Senior Secured Notes for $26.6 million).
Cash flows from operating activities
Net cash used in operating activities was $6.4 million for the nine months ended
September 30, 1999, compared to net cash provided by operating activities of
$0.7 million for the nine months ended September 30, 1998. Net cash used in
operating activities for the nine months ended September 30, 1999 was primarily
the result of income from operations for the period, offset by decreased
accounts payable balances due to the timing of payments to vendors. Net cash
provided by operating activities for the nine months ended September 30, 1998
was primarily the result of income from operations for the period.
Cash flows from investing activities
Cash provided by investing activities was $34.6 million for the nine months
ended September 30, 1999, compared to net cash used in investing activities of
$0.7 million for the nine months ended September 30, 1998. Cash provided by
investing activities for the nine months ended September 30, 1999 was primarily
the result of the sale of the Automotive Magazines (See Note 6 of the Notes to
Condensed Consolidated Financial Statements) for $35.0 million, offset by
capital expenditures of $0.4 million. Cash used in investing activities for the
nine months ended September 30, 1998 was primarily the result of capital
expenditures of $0.7 million.
Cash flows from financing activities
Cash flows used in financing activities were $27.0 million for the nine months
ended September 30, 1999, compared to cash flows used in financing activities of
$1.0 million for the nine months ended September 30, 1998. Affiliated company
advances at September 30, 1999 increased $0.3 million from the December 31, 1998
balance, whereby the Company is owed $2.4 million by GMI as of September 30,
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 to be repaid sixty days
after the end of each quarter in accordance with the terms of an expense sharing
agreement. In September 1999, the Company received a partial payment in the
amount of approximately $1.6 million in cash and in June 1998, the Company
received 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. Of the $2.4 million due to the Company, approximately
$1.2 million has been due for more than 60 days after the relevant quarter.
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. The principal shareholder of GMI has personally
guaranteed the full amount due to the Company. At September 30, 1999, the
Company has a loan outstanding
20
<PAGE>
Item 2. (Continued)
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 nine 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 nine 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 improve and expand its internet site and expects this segment of its business
to continue to grow. Revenue from the Company's internet business for the three
months ended September 30, 1999 increased $0.2 million or 6% over the prior
year. The Company has also increased the cover price of Penthouse magazine one
dollar starting with the 30th Anniversary (September 1999) issue and instituted
cost cutting measures in its publishing and video businesses in order to improve
their profitability. In addition the Company is implementing marketing
initiatives aimed at increasing revenue from its internet and pay-per-call
businesses. The publishing business is expected to continue to be adversely
affected by the consolidation taking place in the domestic single copy magazine
distribution system and may experience a decrease in circulation as a result of
the one dollar increase in the cover price of Penthouse magazine which started
with the 30th Anniversary (September 1999) issue. The extent to which the growth
in the Company's internet business, the cover price increase and the cost
cutting initiatives will be successful in returning the Company to profitability
is unknown at this time.
The Company has a $2.8 million semiannual interest obligation, with the next
payment due on December 31, 1999 and an additional payment due on June 30, 2000.
The ability of the Company to meet its cash obligations over the next twelve
months is dependent upon the Company's ability to generate a positive cash flow
from operations. Management hopes to achieve this through the initiatives
outlined in the preceding paragraph; however there can be no assurance of the
Company's success in achieving these objectives.
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 have responded 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.
21
<PAGE>
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 September 30, 1999, the Company had debt of $51.8 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, however no such claim has yet been filed. In the
opinion of management, the outcome of this litigation is not reasonably likely
to have a material adverse effect on the Company's financial position or results
of operations.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The exhibits listed in the "Exhibit Index" are filed as part of
this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
22
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
General Media, Inc.
(Registrant)
Dated: November 15, 1999 By: /s/ John D. Orlando
-------------------------------------
Signature
John D. Orlando
Senior Vice President-
Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
- ----------- ----
27 Financial Data Schedule
- ----------------------------------------------------------------
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL
MEDIA, INC'S SEPTEMBER 30, 1999 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,683
<SECURITIES> 0
<RECEIVABLES> 6,728
<ALLOWANCES> 0
<INVENTORY> 4,795
<CURRENT-ASSETS> 24,530
<PP&E> 3,383
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,807
<CURRENT-LIABILITIES> 30,255
<BONDS> 51,809
0
0
<COMMON> 5
<OTHER-SE> (53,355)
<TOTAL-LIABILITY-AND-EQUITY> 32,807
<SALES> 59,302
<TOTAL-REVENUES> 59,302
<CGS> 27,237
<TOTAL-COSTS> 31,438
<OTHER-EXPENSES> 361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,277)
<INCOME-PRETAX> 25,366
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 24,079
<DISCONTINUED> 0
<EXTRAORDINARY> 641
<CHANGES> 0
<NET-INCOME> 24,720
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
