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 June 30, 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
- --------------------------------- ----------------------
(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
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 13, 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 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 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>
Six months ended Three months ended
June 30, June 30,
-------- --------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues
Publishing
Newsstand $23,660 $19,124 $11,641 $8,880
Advertising 13,451 7,575 $7,117 $2,085
Subscription 6,002 4,430 $2,959 $1,716
Other 1,806 1,409 $ 891 $ 736
Entertainment 10,821 7,946 $5,129 $4,288
-------- -------- -------- --------
55,740 40,484 27,737 17,705
-------- -------- -------- --------
Operating costs and expenses
Publishing-production, distribution and editorial 22,735 16,894 11,187 6,939
Entertainment-direct costs 1,473 948 504 514
Selling, general and administrative 25,287 20,958 12,662 9,038
Rent expense from affiliated companies 237 241 113 108
Depreciation and amortization 915 511 458 198
-------- -------- -------- --------
Total operating costs and expenses 50,647 39,552 24,924 16,797
-------- -------- -------- --------
Income from operations 5,093 932 2,813 908
-------- -------- -------- --------
Other income (expense)
Gain on sale of Automotive Group 30,734
Interest expense (4,964) (4,588) (2,487) (2,108)
Interest income 279 538 160 313
-------- -------- -------- --------
Income before taxes 408 27,616 486 (887)
Income taxes 1,287
-------- -------- -------- --------
Net income (loss) before extraordinary item 408 26,329 486 (887)
Extraordinary gain from early extinguishment of debt,
net of income taxes of $50,000 in 1999 (Notes 4 & 6) 641 641
-------- -------- -------- --------
Net income (loss) 408 26,970 486 (246)
Accumulated deficit-beginning of period (75,214) (79,493) (75,292) (52,277)
-------- -------- -------- --------
Less: Cash dividend paid (400) (400)
-------- -------- -------- --------
Accumulated deficit-end of period ($75,206) ($52,523) ($75,206) ($52,523)
======== ======== ======== ========
</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, June 30,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,432 $ 5,345
Accounts receivable, net of allowance
for doubtful accounts 9,083 7,994
Inventories 4,658 4,653
Prepaid expenses and other current assets 3,378 2,218
Due from affiliated companies 2,143 2,738
Loan to shareholder 985 1,009
-------- --------
Total current assets 26,679 23,957
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 3,743 3,338
OTHER ASSETS
Intangible assets, net 2,577
Deferred subscription aquisition costs 3,041 790
Deferred debt issuance costs, net 1,998 1,079
Loan to affiliated company 1,086 1,086
Other 2,824 2,532
-------- --------
11,526 5,487
-------- --------
$ 41,948 $ 32,782
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 16,538 $ 10,543
Deferred subscription revenue 11,729 7,200
Deferred internet revenue 1,800 2,100
Other liabilities and accrued expenses 5,426 7,856
-------- --------
Total current liabilities 35,493 27,699
SENIOR SECURED NOTES 79,645 51,770
UNEARNED REVENUE 3,089 2,622
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) (52,523)
-------- --------
(78,070) (51,100)
-------- --------
$ 41,948 $ 32,782
======== ========
</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>
Six months ended
June 30,
--------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 408 $ 26,970
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation and amortization 915 485
Extraordinary gain from early extinguishment of debt (641)
Amortization of debt issuance costs and discounts 584 535
Disposition of Automotive Magazine assets, net of tax (29,447)
Net change in operating assets and liabilities 570 (6,622)
-------- --------
Net cash provided by (used in) operations 2,477 (8,720)
-------- --------
Cash flows from investing activities
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (194) (148)
-------- --------
Net cash provided by (used in) investing activities (194) 34,852
-------- --------
Cash flows from financing activities
Repurchase of Senior Secured Notes (26,600)
Advances to affiliated companies (574) (595)
Loan to shareholder (112) (24)
Repayment by affiliated companies 470
Dividends paid (400)
-------- --------
Net cash used in financing activities (616) (27,219)
-------- --------
Net increase in cash and cash equivalents 1,667 (1,087)
Cash and cash equivalents at beginning of period 7,308 6,432
-------- --------
Cash and cash equivalents at end of period (Note 6) $ 8,975 $ 5,345
======== ========
</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)
(amounts in thousands)
1. Basis of Preparation
General Media, Inc. (the "Company") is a wholly-owned subsidiary of General
Media International, Inc. ("GMI"). The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal, recurring adjustments
considered necessary for a fair presentation, have been included. The balance
sheet information for December 31, 1998 has been derived from the audited
financial statements at that date.
2. Inventories Inventories consist of the following:
December 31, June 30,
1998 1999
------------ --------
------- In Thousands ------
Paper and printing $1,807 $1,580
Editorials and pictorial 2,080 2,267
Film and programming costs 771 806
------ ------
$4,658 $4,653
====== ======
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)
(amounts in thousands)
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) 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 June 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)
(amounts in thousands)
5. Statement of Cash Flows
Cash payments made for interest during the six months ended June 30, 1999 and
1998 were $4.0 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 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 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)
(amounts in thousands)
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 $1.8 million, 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 he 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 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 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 pay subscription service on the
internet.
Results of Operations (Three Months Ended June 30, 1999 vs. 1998)
The Company's revenues were $17.7 million for the three months ended June 30,
1999, compared to revenues of $27.7 million for the three months ended June 30,
1998, a decrease of $10.0 million. Of this decrease, $5.9 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 $8.9
million and $11.6 million for the three months ended June 30, 1999 and 1998,
respectively, a decrease of $2.7 million. The Automotive Magazines accounted for
$1.2 million of this decrease. Newsstand revenues for Mens Magazines were $8.9
and $10.5 million for the three months ended June 30, 1999 and 1998,
respectively, a decrease of $1.6 million. Advertising revenues were $2.1 and
$7.1 million for the three months ended June 30, 1999 and 1998, respectively, a
decrease of $5.0 million. Of this decrease, $3.7 million is attributable to the
loss of advertising revenue from the sale of the Automotive Magazines.
Advertising revenues from Mens Magazines decreased $1.3 million. Subscription
revenues were $1.7 million and $3.0 million for the three months ended June 30,
1999 and 1998, respectively, a decrease of $1.3 million. The decrease in
subscription revenues is primarily attributable to a $1.0 million decrease in
subscription revenues from Automotive Magazines that were sold in the first
quarter and a $0.3 million decrease in subscription revenues from the Mens
Magazines. Revenues for the Entertainment Segment were $4.3 million and $5.1
million for the three months ended June 30, 1999 and 1998, respectively, a
decrease of $0.8 million. Revenues from the Company's video business were $0.6
million and $0.8 million for the three months ended June 30, 1999 and 1998,
respectively, a decrease of $0.2 million. Revenues from the Company's
pay-per-call business were $0.4 million and $0.6 million for the three months
ended June 30, 1999 and 1998, respectively, a decrease of $0.2 million. Revenues
from the Company's internet business were $3.3 million and $3.7 million for the
three months ended June 30, 1999 and 1998, respectively, a decrease of $0.4
million.
Income from operations was $.9 million for the three months ended June 30, 1999,
compared to $2.8 million for the three months ended June 30, 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, both due to the sale
of the Automotive Magazines.
10
<PAGE>
Item 2. (Continued)
Net non-operating expense for the three months ended June 30, 1999 was $1.8
million for the three months ended June 30, 1999, compared to net non-operating
expenses of $2.3 million for the three months ended June 30, 1998, a decrease of
$0.5 million. This decrease is attributable to a reduction in interest expense
of $0.4 million due to a reduction in debt and an increase in interest income of
$0.1 million. Included in interest expense is the amortization of debt issuance
costs and discounts of $0.2 million for the three months ended June 30, 1999,
compared to $0.3 million for the three months ended June 30, 1998.
Net loss for the three months ended June 30, 1999 was $0.2 million, compared to
net income of $0.5 million for the three months ended June 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
----------- ---------------
Three Three
Months Ended Months Ended
June 30, June 30,
-------- --------
1998 1999 1998 1999
---- ---- ---- ----
Publishing Segment $22.6 $13.4 $ 3.5 $ 1.7
Entertainment Segment 5.1 4.3 3.3 2.2
----- ----- ----- -----
$27.7 $17.7 $ 6.8 $ 3.9
Corporate Administrative Expenses (4.0) (3.0)
----- ----- ----- -----
$27.7 $17.7 $ 2.8 $ 0.9
===== ===== ===== =====
Publishing Segment
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Income
Net Revenues from operations
------------ ---------------
Three Three
Months Ended Months Ended
June 30, June 30,
-------- --------
1998 1999 1998 1999
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $16.1 $12.9 $ 2.4 $ 1.3
Foreign edition licensing 0.6 0.5 0.4 0.4
Automotive Magazines 5.9 -- 0.7 --
----- ----- ----- -----
$22.6 $13.4 $ 3.5 $ 1.7
===== ===== ===== =====
11
<PAGE>
Item 2. (Continued)
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $12.9
million and $16.1 million for the three months ended June 30, 1999 and 1998,
respectively, a decrease of $3.2 million. Newsstand revenue was $8.9 million and
$10.5 million for the three months ended June 30, 1999 and 1998, respectively, a
decrease of $1.6 million. The decrease is attributable to a $0.4 million
decrease in newsstand revenue from Penthouse magazine, which resulted from a 4%
decrease in the number of newsstand copies sold and a $1.2 million decrease in
newsstand revenue from the Affiliate Publications, which resulted from a
decrease of 25% 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 second half of 1998.
Advertising revenue for Penthouse magazine and the Affiliate Publications was
$2.1 million for the three months ended June 30, 1999, compared to $3.4 million
for the three months ended June 30, 1998, a decrease of $1.3 million. The
decline in advertising revenues is primarily attributable to a decrease in ad
pages sold in Penthouse and the Affiliate Publications and 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 for
advertising pages sold in the Affiliate Publications during the three months
ended June 30, 1999, as compared to the 1998 period. Subscription revenue was
$1.7 million for the three months ended June 30, 1999, compared to $1.9 million
for the three months ended June 30, 1998, a decrease of $0.2 million due
primarily to a 7% decrease in the number of subsciption copies of Penthouse sold
and a decline in the net revenue per copy of Penthouse sold, partially offset by
a 2% 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 $6.9 million and
$8.3 million for the three months ended June 30, 1999 and 1998, respectively, a
decrease of $1.4 million. Paper costs were $2.6 million for the three months
ended June 30, 1999, compared to $3.1 million for the three months ended June
30, 1998, a decrease of $0.5 million. Print costs were $2.7 million for the
three months ended June 30, 1999, compared to $2.9 million for the three months
ended June 30, 1998, a decrease of $0.2 million. The decrease in paper and print
costs is due primarily to a decrease in the number of pages per issue, a
decrease in copies printed and fewer issues of certain publications printed, as
discussed above, during the three months ended June 30, 1999, as compared to the
three months ended June 30, 1998. Distribution costs were $1.1 million for the
three months ended June 30, 1999, compared to $1.3 million for the three months
ended June 30, 1998, a decrease of $0.2 million. Editorial costs were $0.7
million for the three months ended June 30, 1999, compared to $0.9 million for
the three months ended June 30, 1998, a decrease of $0.2 million.
Selling, general and administrative expenses were $4.6 million for the three
months ended June 30, 1999 compared to $5.4 million for the three months ended
June 30, 1998, a decrease of $0.8 million. The decrease occurred primarily
because expenses during the June 30, 1998 period were increased due to the write
off of an uncollectible advertising account receivable of $0.7 million which
arose 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.
12
<PAGE>
Item 2. (Continued)
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 June 30, 1999 and
1998. Selling, general and administrative expenses were $0.1 million for both
the three months ended June 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 June 30, 1999. Revenues for the Automotive
Magazines were $5.9 million for the three months ended June 30, 1998. This
consisted of newsstand revenues of $1.2 million, advertising revenues of $3.7
million and subscription revenues of $1.0 million.
Publishing-production, distribution and editorial expenses were $2.9 million for
the three months ended June 30, 1998. This consisted of paper costs of $1.2
million, print costs of $1.0 million, distribution costs of $0.6 million and
editorial costs of $0.1 million.
Selling, general and administrative expenses were $2.3 million for the three
months ended June 30, 1998.
Entertainment Segment
Revenues from the Entertainment Segment were $4.3 million for the three months
ended June 30, 1999, compared to $5.1 million for the three months ended June
30, 1998, a decrease of $0.8 million. The Company's video business revenues were
$0.6 million for the three months ended June 30, 1999 compared to $0.8 million
for the three months ended June 30, 1998, a decrease of $0.2 million. The
decrease is due to a decline in sales through the Company's wholesale
distributor and to mailorder 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 $0.6 million for the three months
ended June 30, 1999 and 1998, respectively, a decrease of $0.2 million. Revenues
for the second 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 $3.7
million for the three months ended June 30, 1999 and 1998, respectively, a
decrease of $0.4 million. The decrease occurred due to a reduction in revenue of
$0.2 million from another live internet site "linked" to the Company's site. In
addition, there was a decrease of $0.2 million primarily caused by an increase
in credit card processing fees by the Company's merchant banks during the 1999
period.
Direct costs were $0.5 million for the three months ended June 30, 1999,
compared to $0.4 million for the three months ended June 30, 1998, an increase
of $0.1 million. The increase is due to commissions paid to third party internet
content providers.
Selling, general and administrative expenses were $1.6 million and $1.5 million
for the three months ended June 30, 1999 and June 30, 1998, respectively, an
increase of $0.1 million. The increase is due primarily to higher data
processing, consulting and personnel expenses relating to the continued
development and expansion of the Company's internet business.
13
<PAGE>
Item 2. (Continued)
Corporate Administrative Expenses
Corporate administrative expenses include executive, human resources, finance
and accounting, management information systems and various other expenses.
Corporate administrative expenses were $3.0 million for the three months ended
June 30, 1999, compared to $4.0 million for the three months ended June 30,
1998, a decrease of $1.0 million. The decrease is due primarily to lower salary
expense as a result of corporate downsizing ($0.3 million), lower legal expenses
($0.3), decreased depreciation expense ($0.3 million) and lower rent expense
($0.1 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 June 30, 1999 and 1998.
Results of Operations (Six Months Ended June 30, 1999 vs. 1998)
The Company's revenues were $40.5 million for the six months ended June 30,
1999, compared to revenues of $55.7 million for the six months ended June 30,
1998, a decrease of $15.2 million. Of this decrease, $7.0 million is
attributable to the sale of the Automotive Magazines in the first quarter of
1999. Newsstand revenues were $19.1 million and $23.7 million for the six months
ended June 30, 1999 and 1998, respectively, a decrease of $4.6 million. The sale
of the Automotive Magazines accounted for $1.6 million of this decrease.
Newsstand revenues for Mens Magazines were $18.1and $21.1 million for the six
months ended June 30, 1999 and 1998, respectively, a decrease of $3.0 million.
Advertising revenues were $7.6 and $13.5 million for the six months ended June
30, 1999 and 1998, respectively, a decrease of $5.9 million. Of this amount,
$4.2 million is attributable to a loss of advertising revenue from the sale of
the Automotive Magazines. Advertising revenues from Mens Magazines decreased
$1.7 million. Subscription revenues were $4.4 million and $6.0 million for the
six months ended June 30, 1999 and 1998, respectively, a decrease of $1.6
million. Of this decrease, $1.3 million is attributable to the sale of the
Automotive Magazines and $0.3 million is attributable to a decline in
subscription revenues from Mens Magazines. Revenues for the Entertainment
Segment were $7.9 million and $10.8 million for the six months ended June 30,
1999 and 1998, respectively, a decrease of $2.9 million. Revenues from the
Company's video business were $1.2 million and $2.0 million for the six months
ended June 30, 1999 and 1998, respectively, a decrease of $0.8 million. Revenues
from the Company's pay-per-call business were $0.8 million and $1.6 million for
the six months ended June 30, 1999 and 1998, respectively, a decrease of $0.8
million. Revenues from the Company's internet business were $6.0 million and
$7.3 million for the six months ended June 30, 1999 and 1998, respectively, a
decrease of $1.3 million.
14
<PAGE>
Item 2. (Continued)
Income from operations was $0.9 million for the six months ended June 30, 1999,
compared to $5.1 million for the six months ended June 30, 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, both due to the sale
of the Automotive Magazines.
Net non-operating income for the six months ended June 30, 1999 was $26.7
million, compared to net non-operating expenses of $4.7 million for the six
months ended June 30, 1998. Included in non-operating income for the six months
ended June 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 $0.5 million for the six months ended June 30,
1999, compared to $0.6 million for the six months ended June 30, 1998.
Net income for the six months ended June 30, 1999 was $27.0 million, compared to
net income of $0.4 million for the six months ended June 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
----------- ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1998 1999 1998 1999
---- ---- ---- ----
Publishing Segment $44.9 $32.5 $ 6.7 $ 4.2
Entertainment Segment 10.8 8.0 6.5 3.7
----- ----- ----- -----
$55.7 $40.5 $13.2 $ 7.9
Corporate Administrative Expenses (8.1) (7.0)
----- ----- ----- -----
$55.7 $40.5 $ 5.1 $ 0.9
===== ===== ===== =====
Publishing Segment
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Income
Net Revenues from operations
------------ ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
-------- --------
1998 1999 1998 1999
---- ---- ---- ----
Penthouse Magazine and
the Affiliate Publications $31.9 $26.6 $ 4.3 $ 2.9
Foreign edition licensing 1.1 1.0 0.9 0.8
Automotive Magazines 11.9 4.9 1.5 0.5
----- ----- ----- -----
$44.9 $32.5 $ 6.7 $ 4.2
===== ===== ===== =====
15
<PAGE>
Item 2. (Continued)
Penthouse Magazine and the Affiliate Publications
Revenues for Penthouse magazine and the Affiliate Publications were $26.7
million and $31.9 million for the six months ended June 30, 1999 and 1998,
respectively, a decrease of $5.2 million. Newsstand revenue was $18.1 million
and $21.1 million for the six months ended June 30, 1999 and 1998, respectively,
a decrease of $3.0 million. The decrease is attributable to a $0.9 million
decrease in newsstand revenue from Penthouse magazine, which resulted from a 5%
decrease in the number of newsstand copies sold and a $2.1 million decrease in
newsstand revenue from the Affiliate Publications, which resulted from a
decrease of 23% 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 second half of 1998.
Advertising revenue for Penthouse magazine and the Affiliate Publications was
$3.7 million for the six months ended June 30, 1999, compared to $5.4 million
for the six months ended June 30, 1998, a decrease of $1.7 million. The decline
in advertising revenues is primarily attributable to a decrease in ad pages sold
in Penthouse magazine and 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 in the Affiliate Publications
during the six months ended June 30, 1999, as compared to the 1998 period.
Subscription revenue was $3.6 million for the six months ended June 30, 1999,
compared to $3.9 million for the six months ended June 30, 1998, a decrease of
$0.3 million due primarily to a 1% 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 5% increase in the number of subscription copies of the
Affiliate Publications sold.
Publishing-production, distribution and editorial expenses were $14.4 million
and $16.9 million for the six months ended June 30, 1999 and 1998, respectively,
a decrease of $2.5 million. Paper costs were $5.1 million for the six months
ended June 30, 1999, compared to $6.3 million for the six months ended June 30,
1998, a decrease of $1.2 million. Print costs were $5.4 million for the six
months ended June 30, 1999, compared to $6.3 for the six months ended June 30,
1998, a decrease of $0.9 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 six
months ended June 30, 1999, compared to the six months ended June 30, 1998.
Distribution costs were $2.3 million for the six months ended June 30, 1999,
compared to $2.5 million for the six months ended June 30, 1998. Editorial costs
were $1.6 million for the six months ended June 30, 1999, compared to $1.8
million for the six months ended June 30, 1998.
Selling, general and administrative expenses were $9.4 million for the six
months ended June 30, 1999, compared to $10.7 million for the six months ended
June 30, 1998, a decrease of $1.3 million. The decrease occurred because
expenses during the June 30, 1998 period were increased due to the write off of
an uncollectible advertising account receivable of $1.2 million which arose 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.
Foreign Edition Licensing
Revenues from licensing of foreign editions, which are included in other
revenue, were $1.0 million and $1.1 million for the six months ended June 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.
16
<PAGE>
Item 2. (Continued)
Selling, general and administrative expenses were $0.2 million for both six
month periods ended June 30, 1999 and 1998.
Automotive Magazines
Revenues for the Automotive Magazines were $4.9 million and $11.9 million for
the six months ended June 30, 1999 and 1998, respectively, a decrease of $7.0
million. The decrease is primarily attributable to the sale of the Automotive
Magazines. Newsstand revenues were $1.0 million and $2.6 million for the six
months ended June 30, 1999 and June 30, 1998, respectively, a decrease of $1.6
million. The decrease is due primarily to the publication of fewer issues of the
Automotive Magazines during the 1999 period, as a result of the sale of the
Automotive Magazines on March 2, 1999 (See Note 6 of the Notes to Condensed
Consolidated Financial Statements). Advertising revenues were $3.0 million and
$7.2 million for the six months ended June 30, 1999 and 1998, respectively, a
decrease of $4.2 million, which is due primarily to the publication of fewer
issues of certain publications, as noted above, during the six months ended June
30, 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 $2.1 million for the six month period ended June
30, 1999 and 1998, respectively, a decrease of $1.3 million. The decrease is due
primarily to the publication of fewer issues of the Automotive Magazines, as
noted above, during the six months ended June 30, 1999.
Publishing-production, distribution and editorial expenses were $2.5 million and
$5.8 million for the six months ended June 30, 1999 and 1998, respectively, a
decrease of $3.3 million. Paper costs were $1.0 million and $2.4 million for the
six months ended June 30, 1999 and 1998, respectively, a decrease of $1.4
million. Print costs were $0.9 million and $2.0 million for the six months ended
June 30, 1999 and 1998, respectively, a decrease of $1.1 million. Distribution
costs were $0.6 million and $1.3 million for the six months ended June 30, 1999
and 1998, respectively, a decrease of $0.7. Editorial costs were $0.1 million
and $0.2 million for the six months ended June 30, 1999 and 1998, respectively,
a decrease of $0.1 million.
Selling, general and administrative expenses were $1.9 million and $4.6 million
for the six months ended June 30, 1999 and 1998, respectively, a decrease of
$2.7 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.
17
<PAGE>
Item 2. (Continued)
Entertainment Segment
Revenues from the Entertainment Segment were $7.9 million for the six months
ended June 30, 1999, compared to $10.8 million for the six months ended June 30,
1998, a decrease of $2.9 million. The Company's video business revenues were
$1.2 million for the six months ended June 30, 1999, compared to $2.0 million
for the six months ended June 30, 1998, a decrease of $0.8 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 $0.8 million and $1.6 million for the six months ended June 30, 1999 and
1998, respectively, a decrease of $0.8 million. Commencing February 1, 1998, the
Company engaged a new service bureau to process its main pay-per-call business.
Accordingly, revenues for the first half of 1999 were lower due to the
transition and due to the arrangement with its new service bureau whereby the
Company receives a fixed rate per minute, on a net basis. In addition, revenues
for the first half 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 $6.0 million and $7.3 million for
the six months ended June 30, 1999 and 1998, respectively, a decrease of $1.3
million. The decrease occurred due to a reduction in revenue of $0.6 million
from another live internet site "linked" to the Company's site. 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, 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 and a decrease of $0.2 million primarily caused by an increase in credit
card processing fees charged by the Company's merchant banks during the 1999
period.
Direct costs were $0.9 million for the six months ended June 30, 1999, compared
to $1.3 million for the six months ended June 30, 1998, a decrease of $0.4
million. Direct costs decreased by $0.5 million due to the change in service
bureaus processing the Company's pay-per-call business, as discussed above,
offset partially by an increase in direct costs of $0.1 million due to
commissions paid to third party internet content providers.
Selling, general and administrative expenses were $3.3 million and $3.0 million
for the six months ended June 30, 1999 and June 30, 1998, respectively, an
increase of $0.3 million. The increase is due primarily to higher data
processing, consulting and personnel expense relating to the continued
development and expansion of the Company's internet business.
Corporate Administrative Expenses
Corporate administrative expense include executive, human resources, finance and
accounting, management information systems and various other expenses. Corporate
administrative expenses were $7.0 million for the six months ended June 30,
1999, compared to $8.1 million for the six months ended June 30, 1998, a
decrease of $1.1 million. The decrease is due to decreased salary expense ($0.5
million), decreased rent expense ($0.2 million) and decreased depreciation
expense ($0.4 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 $0.2 million for both the
six months ended June 30, 1999 and 1998.
18
<PAGE>
Item 2. (Continued)
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 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 October 31, 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 June
1999, approximately $0.9 million of such costs had already been incurred.
19
<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 June 30, 1999, the Company had $5.3 million in cash and cash equivalents,
compared to $6.4 million at December 31, 1998. The decrease in cash and cash
equivalents during the six months ended June 30, 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
$8.7 million and cash flows used in financing activities of $27.2 million (the
repurchase of Senior Secured Notes of $26.6 million).
Cash flows from operating activities
Net cash used in operating activities was $8.7 million for the six months ended
June 30, 1999, compared to net cash provided by operating activities of $2.5
million for the six months ended June 30, 1998. Net cash used in operating
activities for the six months ended June 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 six months ended June 30, 1998 was primarily the
result of income from operations for the period.
Cash flows from investing activities
Cash provided by investing activities was $34.9 million for the six months ended
June 30, 1999, compared to net cash used in investing activities of $0.2 million
for the six months ended June 30, 1998. Cash provided by investing activities
for the six months ended June 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 $0.1
million. Cash used in investing activities for the six months ended June 30,
1998 was primarily the result of capital expenditures of $0.2 million.
Cash flows from financing activities
Cash flows used in financing activities were $27.2 million for the six months
ended June 30, 1999, compared to cash flows used in financing activities of $0.6
million for the six months ended June 30, 1998. Affiliated company advances at
June 30, 1999 increased $0.6 million from the December 31, 1998 balance, whereby
the Company is owed $2.7 million by GMI as of June 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
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 $2.7 million, has not been made by August 13, 1999. Demand for payment
has been made in writing. Management of the Company believes that GMI and its
subsidiaries have sufficient assets to enable
20
<PAGE>
Item 2. (Continued)
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 June 30, 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 six 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 six 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 six 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 $0.6 million
from another internet site "linked" to the Company's site. In addition, 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, 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 and a decrease of $0.2 million primarily caused by an increase in credit
card processing fees charged by the Company's merchant banks during the 1999
period. 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 $2.8 million semiannual interest payment due on December 31,
1999 and June 30, 2000. 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.
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.
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 June 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
June 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: August 13, 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 JUNE 30, 1999 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 5,345
<SECURITIES> 0
<RECEIVABLES> 7,994
<ALLOWANCES> 0
<INVENTORY> 4,653
<CURRENT-ASSETS> 23,957
<PP&E> 3,338
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,782
<CURRENT-LIABILITIES> 27,699
<BONDS> 51,770
0
0
<COMMON> 5
<OTHER-SE> (51,100)
<TOTAL-LIABILITY-AND-EQUITY> 32,782
<SALES> 40,484
<TOTAL-REVENUES> 40,484
<CGS> 17,842
<TOTAL-COSTS> 21,469
<OTHER-EXPENSES> 241
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,588)
<INCOME-PRETAX> 27,616
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 26,329
<DISCONTINUED> 0
<EXTRAORDINARY> 641
<CHANGES> 0
<NET-INCOME> 26,970
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
