<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
of the Securities Exchange Act of 1934
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Commission
For the Quarterly Period Ended March 31, 2000 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
- ------------------------------------------------------------------------
(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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Class Outstanding at April 27, 2000
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Common stock, $.01 par value 475,000
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GENERAL MEDIA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
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PART I-FINANCIAL INFORMATION
- ----------------------------
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Item 3. Quantitative And Qualitative Disclosures About Market Risk 16
PART II- OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 16
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 16
Signatures 17
Exhibit Index 18
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2
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ITEM 1. FINANCIAL STATEMENTS
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1999 2000
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<S> <C> <C>
NET REVENUES
Publishing
Newsstand $10,244 $9,876
Advertising 5,490 2,445
Subscription 2,714 1,681
Other 673 822
Entertainment 3,658 4,072
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22,779 18,896
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OPERATING COSTS AND EXPENSES
Publishing-production, distribution and editorial 9,955 7,464
Entertainment- direct costs 434 301
Selling, general and administrative 11,920 8,258
Rent expense from affiliated companies 133 135
Depreciation and amortization 313 213
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Total operating costs and expenses 22,755 16,371
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Income from operations 24 2,525
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OTHER INCOME (EXPENSE)
Gain on sale of Automotive Group 30,734
Interest expense (2,480) (1,697)
Interest income 225 126
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INCOME BEFORE TAXES 28,503 954
Income taxes 1,287 375
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Net income 27,216 579
Accumulated deficit-beginning of period (79,493) (59,606)
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Accumulated deficit-end of period ($52,277) ($59,027)
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
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GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
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<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
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ASSETS
------
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash and cash equivalents $5,659 $8,246
Accounts receivable, net of
allowance for doubtful accounts 6,801 4,172
Inventories 4,523 4,812
Prepaid expenses and other current assets 1,474 1,243
Due from affiliated companies 2,996 2,636
Loan to shareholder 862 886
---------------------- -----------------------
Total current assets 22,315 21,995
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation 3,372 3,258
OTHER ASSETS
- ------------
Deferred subscription aquisition costs 397 363
Deferred debt issuance costs, net 720 539
Loan to affiliated company 1,086 1,086
Fine Arts and collectibles 470 2,270
Other 1,944 1,827
---------------------- -----------------------
4,617 6,085
---------------------- -----------------------
$30,304 $31,338
====================== =======================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
- -------------------
Current Maturities of Senior Secured Notes $51,847 $51,885
Accounts payable 12,298 12,892
Deferred revenue 8,954 8,705
Other liabilities and accrued expenses 8,901 9,096
---------------------- -----------------------
Total current liabilities 82,000 82,578
UNEARNED REVENUE 2,066 1,989
OTHER NON-CURRENT LIABILITIES 1,150 1,104
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 2,898 2,898
Accumulated deficit (59,606) (59,027)
---------------------- -----------------------
(56,703) (56,124)
---------------------- -----------------------
$30,304 $31,338
====================== =======================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
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GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
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THREE MONTHS ENDED
MARCH 31,
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1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $27,216 $579
Adjustments to reconcile net income to
cash provided by (used in) operating activities
Depreciation and amortization 313 213
Amortization of debt issuance costs and discounts 292 219
Disposition of Automotive Magazine assets, net of tax (29,447)
Income taxes payable to affiliated companies 375
Accrued interest on loan to shareholder (26) (24)
Net change in operating assets and liabilities 56 3,138
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Net cash provided by (used in) operations (1,596) 4,500
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CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (113) (98)
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Net cash provided by (used in) investing activities 34,887 (98)
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CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Advances to affiliated companies (283) (1,815)
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Net cash used in financing activities (283) (1,815)
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Net increase in cash and cash equivalents 33,008 2,587
Cash and cash equivalents at beginning of period 6,432 5,659
--------------------- --------------------
Cash and cash equivalents at end of period $39,440 $8,246
===================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
Cash paid during the period for:
Interest $60 $60
Income Taxes $275 $9
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
- ---------------------------------------------------------
Non-cash repayment by affiliated companies $1,800
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
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, 1999 has been derived from the
audited financial statements at that date.
Generally accepted accounting principles contemplate continuation of the
Company as a going concern. The Company's Senior Secured Notes (the "Notes")
totaling $52,000,000 (see Note 4) mature on December 31, 2000. Although the
Company is actively seeking to secure a source of funding for the refinancing
of the Notes, there can be no assurance that the Company will be able to secure
the source of funding it needs in time to refinance the Notes. If a suitable
source of funding is not found, the Company will not be able to generate
sufficient funds from operations in time to repay the Notes upon maturity,
therefore the Company's ability to continue as a going concern in the future is
dependent on its ability to refinance the Notes. Moreover, even if a suitable
refinancing source is found, there can be no assurance that the terms of the
refinancing will be as favorable as the current terms existing under the
Company's Notes. In the event that the Company cannot repay the Notes, the
trustee, under the Indenture, could assume control over the Company and
substantially all its assets including its registered trademarks.
The Company has undertaken several actions during the fourth quarter of 1999
and in the current period to achieve profitability and improve cash flow. These
actions have improved the profitability of the Company during the current
period, resulting in income from operations of $2,525,000, net income of
$579,000, positive cash flows from operations of $4,500,000 and overall
positive cash flows of $2,587,000 for the three months ended March 31, 2000.
Further actions are currently under way and planned for the future to continue
the improvement in the Company's profitability and cash flow.
2. INVENTORIES
Inventories consist of the following:
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December 31, March 31,
1999 2000
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Paper and printing $ 1,702 $ 1,967
Editorials and pictorial 2,295 2,195
Film and programming costs 526 650
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$ 4,523 $ 4,812
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6
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GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
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.
4. SENIOR SECURED NOTES
On December 21, 1993, the Company issued $85,000,000 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. Beginning December 31, 1999 the Notes can
be redeemed at the option of the Company 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 102,506 warrants (the
"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 from the year
of issuance of the Notes, and, beginning in 1999, the holders have the right to
require the Company to purchase for cash all the Warrants at their fair value.
At the time of issuance, the Company recorded the Warrants at fair value
determined to be $1,841,000. Debt issuance costs, consisting of placement agent
commissions, and professional and underwriters' fees totaling approximately
$7,141,000, are being amortized over seven years.
In July 1995, the Company repurchased $5,000,000 face amount of its outstanding
Senior Secured Notes, including 5,000 warrants, for cash of $4,050,000. In May
1999, the Company repurchased $28,000,000 face amount of its outstanding Notes
for cash of $26,600,000.
The Notes are collateralized 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.
7
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GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
4. (CONTINUED)
The indenture contains covenants which , among other things, (i) restrict the
ability of the Company to dispose of assets, incur indebtedness, create liens
and make certain investments, (ii) require the Company to maintain a minimum
consolidated tangible net worth (deficiency) of $(81,600,000), and (iii)
restrict the Company's ability to pay dividends unless certain financial
performance tests are met. The Company's subsidiaries, who are guarantors of
the Senior Secured Notes under the indenture, however, are permitted to pay
intercompany dividends on their shares of common stock. The ability of the
Company and its subsidiaries to incur additional debt is severely limited by
such covenants. As of March 31, 2000, the Company was in compliance with all
such covenants.
During the first three months of 2000, the Company made non-permitted advances
of approximately $1,005,000 to GMI that caused non-compliance with certain
covenants of the Indenture. This amount was repaid in full with interest on
March 27, 2000 by a transfer of 100% of the outstanding stock of a subsidiary
of GMI whose net assets consist of works of art and other valuables which have
been appraised at $1,800,000 by Sotheby's Inc.. Approximately $19,000 of the
remaining balance of $795,000 was applied against interest charged on the
advances and approximately $776,000 was applied against the outstanding
receivable from GMI.
5. INCOME TAXES
The Company and its subsidiaries are included in the consolidated Federal
income tax return of GMI. The provision for income taxes in the accompanying
statements of income is allocated to the Company from GMI as if the Company
filed separate income tax returns. Since each member of a consolidated tax
group is jointly and severally liable for Federal income taxes of the entire
group, the Company may be liable for taxes of GMI or other members of the
consolidated group. Under the terms of a Tax Sharing and Indemnification
Agreement (the "Agreement"), the Company is required to remit income taxes to
GMI beginning in the year in which the Company's Senior Secured Notes are paid
to the extent that the Company utilizes the net operating losses ("NOL's") of
GMI to reduce its income tax liabilities. GMI has available for Federal income
tax purposes NOL's aggregating approximately $82,142,000 which can be used by
the Company to reduce future taxes, as long as the Company is a member of GMI's
consolidated group. The amount of taxes that the Company would have paid for
the three months ended March 31, 2000 had GMI's net operating losses not been
made available to the Company was approximately $375,000. This amount has been
recorded in the accompanying financial statements as the income tax provision
for the period and as a reduction of the amount due from affiliated companies.
The income tax provision for the three months ended March 31, 2000 consists of
federal income taxes of approximately $330,000 and state income taxes of
approximately $45,000. Under the terms of the Agreement no cash has been paid
by the Company to GMI. Payment of these taxes to GMI are due within thirty days
after the Company pays the group consolidated tax liability.
8
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Several of the Company's businesses can experience fluctuations in quarterly
performance. For example, newsstand revenues vary from issue to issue with
higher revenues for special and higher priced issues and any issue including
editorial or pictorial features that generate unusual public interest. In
addition, revenues from the licensing of the Company's trademarks, products and
videos vary with the timing of new agreements. As a result, the Company's
performance in any quarterly period is not necessarily reflective of full-year
results.
The Company is currently engaged in activities in two industry segments:
publishing and entertainment. The publishing segment of the Company is engaged
in the publication of Penthouse Magazine and six (five, after December 1999)
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 1999, the publication of four
specialty automotive magazines: Four Wheeler, Stock Car Racing, Open Wheel, and
Drag Racing Monthly (the "Automotive Magazines"). The Company suspended
publication of the Affiliate Publication Hot Talk in December 1999 due to poor
financial performance of the magazine and the Automotive Magazines were sold on
March 2, 1999. In December 1999, the Company launched Mind & Muscle Power
("Power") magazine which targets the men's health and fitness magazine market.
The initial issue was launched as a free supplement packaged with the January
2000 issue of Penthouse Magazine which went on sale in December 1999. The
second issue went on sale in March 2000 with regular monthly issues expected
thereafter. 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 the sale of memberships to the
Company's internet site.
RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2000 VS. 1999)
The Company's revenues were $18.9 million for the three months ended March 31,
2000, compared to revenues of $22.8 million for the three months ended March
31, 1999, a decrease of $3.9 million. Included in the $22.8 million of revenue
for the three months ended March 31, 1999 is $4.9 million of revenue from the
Automotive Magazines. After giving effect to the sale of the Automotive
Magazines, the Company's revenues increased by $1.0 million. Newsstand revenues
were $9.9 million and $10.2 million for the three months ended March 31, 2000
and 1999, respectively, a decrease of $0.3 million. Included in the $10.2
million of newsstand revenues for the three months ended March 31, 1999 is $1.0
million of revenues from the Automotive Magazines. After giving effect to the
sale of the Automotive Magazines, the Company's revenues increased by $0.7
million. Newsstand revenues for Mens Magazines were $9.6 and $9.2 million for
the three months ended March 31, 2000 and 1999, respectively, an increase of
$0.4 million. Newsstand revenues for Power Magazine were $0.3 million for the
three months ending March 31, 2000. Advertising revenues were $2.4 and $5.5
million for the three months ended March 31, 2000 and 1999, respectively, a
decrease of $3.1 million. Of this amount, $3.0 million is attributable to a
loss of advertising revenue from the sale of the Automotive Magazines.
Advertising revenues from Mens Magazines decreased $0.2 million, which was
partially offset by advertising revenues from Power Magazine of $0.1 million
during the three months ended March 31, 2000. Subscription revenues were $1.7
million and $2.7 million for the three months ended March 31, 2000 and 1999,
respectively, a decrease of $1.0 million. Of this amount, $0.8 million is
attributable to the sale of the Automotive Magazines and $0.2 million is
attributable to a decline in subscription revenues from the Mens Magazines.
Revenues for the Entertainment Segment were $4.1 million and $3.7 million for
the three months ended March 31, 2000 and 1999, respectively, an increase of $0
.4 million. Revenues from the Company's video business were $0.7 million and
$0.6 million for the three months ended March 31, 2000 and 1999, respectively,
an increase of $0.1 million. Revenues from
9
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ITEM 2. (CONTINUED)
the Company's pay-per-call business were $0.3 million and $0.4 million for the
three months ended March 31, 2000 and 1999, respectively, a decrease of $0.1
million. Revenues from the Company's internet business were $3.0 million and
$2.6 million for the three months ended March 31, 2000 and 1999, respectively,
an increase of $0.4 million.
Income from operations was $2.5 million for the three months ended March 31,
2000, compared to $0.024 million for the three months ended March 31, 1999.
Income from operations was positively impacted by:
[ ] an increase in the newsstand cover price of Penthouse Magazine,
[ ] an increase in the subscription price for Penthouse Magazine,
[ ] decreased production and distribution costs as a result of a decrease
in the number of newsstand copies printed and a decrease in the number
of pages per issue,
[ ] increased newsstand sales efficiencies,
[ ] increased revenue from the Company's video business due to contracts
with a new national digital video disk ("DVD") wholesale distributor,
[ ] increased revenues from the internet business due to decreased
chargebacks as a result of improvements in methods used to "scrub"
membership information for invalid credit cards and duplicate credit
card charges and due to marketing programs to encourage monthly
memberships which generally result in lower chargeback rates than
other membership periods,
[ ] suspended publication of Hot Talk in December 1999 which was an
unprofitable publication,
[ ] decreased selling, general and administrative expenses due to
decreased consulting fees, attorneys fees, professional fees, and
[ ] reduced salary expenses caused by a reduction in the number of
employees as a result of restructuring the Company's operations.
Net non-operating expense for the three months ended March 31, 2000 was $1.6
million, compared to net non-operating income of $28.5 million for the three
months ended March 31, 1999. Included in non-operating income for the three
months ended March 31, 1999 is a before tax gain of $30.7 million from the sale
of the Automotive Magazines. Interest expense for the three months ended March
31, 2000 was $1.7 million, compared to interest expense of $2.5 million for the
three months ended March 31, 1999. The decrease in interest expense is a result
of the repurchase of the principal amount of $28,000,000 of the Company's Notes
in May 1999 (see Note 4). Included in interest expense is the amortization of
debt issuance costs and discounts of $0.2 million and $0.3 million for the
three months ended March 31, 2000 and 1999, respectively.
As a result of the above discussed factors, net income for the three months
ended March 31, 2000 was $0.6 million, compared to a net loss of $2.2 million
before giving effect to a gain of $29.4 million, net of taxes, from the sale of
the Automotive Group, which when included, resulted in net income of $27.2
million for the three months ended March 31, 1999.
10
<PAGE> 11
ITEM 2. (CONTINUED)
The net revenues and income from operations of the Company were as follows (in
millions):
<TABLE>
<CAPTION>
Income
Net Revenue from operations
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Three Three
Months Ended Months Ended
March 31, March 31,
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1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Publishing Segment $19.1 $14.8 $2.4 $3.1
Entertainment Segment 3.7 4.1 1.6 2.6
--- --- --- ---
$22.8 $18.9 $4.0 $5.7
Corporate Administrative Expenses (4.0) (3.2)
----- ---- ----- -----
$22.8 $18.9 $0.0 $2.5
===== ===== ==== ====
</TABLE>
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
<TABLE>
<CAPTION>
Income
Net Revenues from operations
------------ ---------------
Three Three
Months Ended Months Ended
March 31, March 31,
---------- ---------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $13.7 $13.8 $1.3 $2.7
Foreign edition licensing 0.5 0.6 0.4 0.5
Power Magazine 0.0 0.4 0.0 (0.1)
Automotive Magazines 4.9 0.0 0.7 0.0
--- --- --- ---
$19.1 $14.8 $2.4 $3.1
===== ====== ==== ====
</TABLE>
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $13.8
million and $13.7 million for the three months ended March 31, 2000 and 1999,
respectively, an increase of $0.1 million. Newsstand revenue was $9.6 million
and $9.2 million for the three months ended March 31, 2000 and 1999,
respectively, an increase of $0.4 million. The increase is primarily
attributable to an increase in the cover price of Penthouse magazine, offset by
lost revenue due to the suspension of publication of Hot Talk magazine
effective December 1999. Advertising revenue was $2.3 million and $2.5 million
for the three months ended March 31, 2000 and 1999, respectively, a decrease of
$0.2 million. The decrease in advertising revenue is primarily attributable to
a decrease in the number of advertising pages sold in Penthouse and the
Affiliate Publications, partially offset by an increase in the average
advertising rate per page in these publications, and due to the suspension of
publication of Hot Talk magazine as noted above. Subscription revenue was $1.7
million and $1.9 million for the three months ended
11
<PAGE> 12
ITEM 2. (CONTINUED)
March 31, 2000 and 1999, respectively, a decrease of $0.2 million due primarily
to a decrease in the number of subscription copies sold of Penthouse, offset by
an increase in the net revenue per copy sold of Penthouse, and due to a
decrease in the net revenue per copy sold of the Affiliate Publications. In the
third quarter of 1999 the Company increased the subscription price for
Penthouse Magazine and reduced discounts offered to its subscription agents to
improve the profitability of subscriptions sold. As a result of this action,
the Company experienced a decrease in subscription copies sold with an
offsetting increase in net revenue per copy during the three months ended March
31, 2000.
Publishing-production, distribution and editorial expenses were $7.3 million
and $7.5 million for the three months ended March 31, 2000 and 1999,
respectively, a decrease of $0.2 million. Paper costs were $2.8 million for the
three months ended March 31, 2000, compared to $2.6 million for the three
months ended March 31, 1999, an increase of $0.2 million. The increase is due
primarily to an increase in the cost per pound of paper, partially offset by a
decrease in the number of copies printed and a decrease in the number of pages
per issue. Print costs were $2.6 million for the three months ended March 31,
2000, compared to $2.8 million for the three months ended March 31, 1999, a
decrease of $0.2 million. The decrease in print costs is due primarily to the
decrease in the number of copies printed and a decrease in the number of pages
per issue, as mentioned above, partially offset by increases in the cost of
printing. Distribution costs were $1.1 million and $1.2 million for the three
months ended March 31, 2000 and 1999 respectively, a decrease of 0.1 million.
Editorial costs were $0.8 and $0.9 million for the three months ended March 31,
2000 and 1999, respectively, a decrease of $0.1 million.
Selling, general and administrative expenses were $3.9 million for the three
months ended March 31, 2000, compared to $4.9 million for the three months
ended March 31, 1999, a decrease of $1.0 million. The decrease is primarily due
to decreased subscription acquisition costs of $0.4 million as a result of
fewer direct subscription mailings and decreased salaries of $0.4 million
during the three months ended March of 2000.
FOREIGN EDITION LICENSING
Revenues from licensing of foreign editions, which are included in other
revenue, were $0.6 million and $0.5 million for the three months ended March
31, 2000 and 1999, respectively, an increase of $0.1 million. The increase is
due primarily to the addition of revenue from new contracts with foreign
licensees of Penthouse magazine.
POWER MAGAZINE
There was only one issue (April 2000) of Power Magazine during the three months
ended March 31, 2000. Revenues for this issue were $0.4 million. Newsstand
revenues were $0.3 million and advertising revenue was $0.1 million.
Publishing-production, distribution and editorial expenses were $0.2 million
for the three months ended March 31, 2000.
Selling, general and administrative expenses were $0.2 million for the three
months ended March 31, 2000.
12
<PAGE> 13
ITEM 2. (CONTINUED)
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $4.1 million for the three months
ended March 31, 2000, compared to $3.7 million for the three months ended March
31, 1999, an increase of $0.4 million. The Company's video business revenues
were $0.7 million for the three months ended March 31, 2000, compared to $0.6
million for the three months ended March 31, 1999, an increase of $0.1 million.
The increase is due primarily to royalties earned from the licensing of DVD's
through the Company's new national wholesale distributor. Revenues from the
Company's pay-per-call business were $0.3 million and $0.4 million for the
three months ended March 31, 2000 and 1999, respectively, a decrease of $0.1
million. Revenues for the first quarter of 2000 were lower due to higher
chargeback and reserve rates, lower billable minutes and the termination of
certain contracts with respect to the Company's smaller service bureaus. The
Company's internet business revenues were $3.1 million and $2.7 million for the
three months ended March 31, 2000 and 1999, respectively, an increase of $0.4
million. The increase is primarily attributable to lower chargebacks. The
Company has been able to lower chargebacks by improving the methods used to
"scrub" membership information for invalid credit cards and duplicate credit
card charges. In addition, the Company is shifting its marketing programs to
encourage monthly memberships which generally result in lower chargeback levels
than other membership periods.
Direct costs were $0.3 million for the three months ended March 31, 2000,
compared to $0.4 million for the three months ended March 31, 1999, a decrease
of $0.1 million. The decrease is primarily attributable to $0.2 million of
lower costs due to the change to a new national wholesale DVD distributor, as
discussed above, partially offset by higher costs of $0.1 million in the
current year for video content purchased for the Penthouse web site.
Selling, general and administrative expenses were $1.2 million and $1.7 million
for the three months ended March 31, 2000 and 1999, respectively, a decrease of
$0.5 million. The decrease is due primarily to lower negotiated web hosting
costs and lower consulting and personnel expenses relating to the internet and
video departments. Consulting expenses have decreased due to an increased
reliance on internal resources and creative talent within the Company to
develop and expand the content offered on the Penthouse site to attract a wider
audience.
CORPORATE ADMINISTRATIVE EXPENSE
Corporate administrative expenses includes executive, legal, human resources,
finance and accounting and management information systems costs related to the
operation of the corporate and executive offices and various other expenses.
Corporate administrative expenses were $3.2 million for the three months ended
March 31, 2000, compared to $4.0 million for the three months ended March 31,
1999, a decrease of $0.8 million. This decrease is primarily attributable to
decreased expenses of $0.1 million as a result of the sale of the Automotive
Magazines and decreased salary expenses ($0.2 million), consulting fees ($0.1
million), attorney fees ($0.2 million) and professional fees ($0.1 million).
RENT EXPENSE FROM AFFILIATED COMPANIES
Rent expense from affiliated companies represents charges from affiliated
companies for the use by the Company of affiliates' facilities. The charge is
based upon the Company's proportionate share of the operating expenses of such
facilities. Rent expense from affiliated companies was $0.1 million for the
three months ended March 31, 2000 and 1999.
13
<PAGE> 14
ITEM 2. (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $8.2 million in cash and cash equivalents,
compared to $5.7 million at December 31, 1999. The increase in cash and cash
equivalents during the three months ended March 31, 2000, resulted from cash
flows provided by operating activities of $4.5 million, partially offset by
cash flows used in investing activities of $0.1 million and cash flows used in
financing activities of $1.8 million.
Cash flows from operating activities
Net cash provided by operating activities was $4.5 million for the three
months ended March 31, 2000, compared to net cash used by operating
activities of $1.6 million for the three months ended March 31, 1999, an
improvement of $6.1 million. Net cash provided by operating activities for
the three months ended March 31, 2000 was primarily the result of income
from operations for the period and a decrease in accounts receivable as a
result of the timing of advance payments from distributors, increases in the
amounts of advance payments from distributors as a result of improved
newsstand efficiencies, improved collections of advertising accounts
receivable and the resolution of several collection problems during the
current period, increased accounts payable and accrued expenses due to the
timing of payments to vendors, partially offset by higher paper inventory
levels due to an increase in the price of paper and the timing of paper
purchases related to the printing of the Canadian editions of the Company's
magazines. Net cash used in operating activities for the three months ended
March 31, 1999 was primarily the result of a decrease in accounts payable
due to the timing of payments to vendors.
Cash flows from investing activities
Cash used in investing activities was $0.1 million for the three months
ended March 31, 2000, compared to net cash provided by investing activities
of $34.9 million for the three months ended March 31, 1999. Cash used in
investing activities for the three months ended March 31, 2000 was primarily
the result of capital expenditures of $0.1 million. Cash provided by
investing activities for the three months ended March 31, 1999 was primarily
the result of the sale of the Automotive Magazines for $35.0 million, offset
by capital expenditures of $0.1 million.
Cash flows from financing activities
Cash flows used in financing activities were $1.8 million for the three
months ended March 31, 2000, compared to cash flows used in financing
activities of $0.3 million for the three months ended March 31, 1999.
Affiliated company advances at March 31, 2000 decreased $0.4 million from
the December 31, 1999 balance, whereby the Company is owed $2.6 million by
GMI as of March 31, 2000. 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. During the
three months ended March 31, 2000, the Company made non-permitted advances
of approximately $1.0 million to GMI that caused non-compliance with certain
covenants of the Indenture. This amount was fully repaid with interest on
March 27, 2000 by a transfer of 100% of the outstanding stock of a
subsidiary of GMI whose net assets consist of fine arts and other valuables
which have been appraised at $1,800,000 by Sotheby's Inc.. Approximately
$19,000 of the remaining balance of $795,000 was applied against interest
charged on the advances and approximately $776,000 was applied against the
outstanding receivable from GMI. The management of the Company believes that
GMI and its subsidiaries have sufficient net assets to enable the Company to
ultimately recover its advance through liquidation of certain of those
assets
14
<PAGE> 15
ITEM 2. (CONTINUED)
or through refinancing of GMI's debts. The ability of the Company to realize
repayment of its advance is dependant upon the success of GMI in refinancing
its existing debt obligations, some of which are currently in default. The
principal shareholder of GMI has guaranteed the full amount due to the Company.
At March 31, 2000, the Company has a loan outstanding to the principal
shareholder of GMI of $0.9 million. The loan is evidenced by a promissory note,
bears interest at 11% per annum, and is payable on December 31, 2000.
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 cash balance was $8.2 million at March 31, 2000 compared to $5.7
million at December 31, 1999. During the three months ended March 31, 2000, the
Company, provided $4.5 million in cash flow from its operations. The Company
has a $2.8 million semiannual interest payment due on each of June 30, 2000 and
December 31, 2000 and the Company's Senior Secured Notes (the "Notes") totaling
$52,000,000 mature on December 31, 2000. Although the Company is actively
seeking to secure a source of funding for the refinancing of the Notes, there
can be no assurance that the Company will be able to secure the source of
funding it needs in time to refinance the Notes. While cash on hand and cash
generated from operations are anticipated to be sufficient to cover the
interest payments, the Company will not generate sufficient funds from
operations in time to repay the Notes upon maturity, therefore the Company's
ability to continue as a going concern in the future is dependent on its
ability to refinance the Notes. Moreover, even if a suitable refinancing source
is found, there can be no assurance that the terms of the refinancing will be
as favorable as the current terms existing under the Company's Notes. In the
event that the Company cannot repay the Notes, the trustee, under the
Indenture, could assume control over the Company and substantially all its
assets including its registered trademarks.
The Company has undertaken several actions during the fourth quarter of 1999
and in the current period to achieve profitability and improve cash flow. These
actions have improved the profitability of the Company during the current
period, resulting in income from operations of $2.5 million, net income of
$579,000, positive cash flows from operations of $4.5 million and overall
positive cash flows of $2.6 million for the first three months ended March 31,
2000. Further actions are currently under way and planned for the future to
continue the improvement in the Company's profitability and cash flow.
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
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 and that as to a refinancing of
the Company's Notes, that refinancing sources are available. 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.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates.
Management does not believe that it has any foreign currency rate risk.
Interest Rates-As of March 31, 2000, the Company had debt of $51.9 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
On January 23,1997, the Company filed in United States District Court for the
Southern District of New York an action (the "Action") under the Racketeer
Influenced and Corrupt Organizations Act ("RICO") alleging, among other things,
that certain defendants conspired to defraud the Company by fraudulently
backdating a contract (the "DEC Contract") which awarded exclusive rights to
develop a "live" Penthouse internet site to defendant Deluxe Entertainment
Corp. ("DEC"). On January 24, 1997 DEC served a demand on the Company for
arbitration under the DEC Contract on the issues of breach and damages. The DEC
Contract provides a minimum damage award of $30 million in addition to
incidental, consequential and punitive damages and compensation for lost
profits. In July 1998 the United States District Court granted DEC's motion for
an arbitration which is scheduled to begin in California in June 2000. The
Company intends to vigorously defend the arbitration. 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.
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
<S> <C>
(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 March 31, 2000.
</TABLE>
16
<PAGE> 17
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: April 27, 2000 By: /s/ John D. Orlando
----------------------------------
Signature
John D. Orlando
Senior Vice President-Chief
Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Item
- ----------- ----
<S> <C>
27 Financial Data Schedule
</TABLE>
- -----------------------------------------------------------------------------
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL
MEDIA, INC'S MARCH 31, 2000 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,246
<SECURITIES> 0
<RECEIVABLES> 4,172
<ALLOWANCES> 0
<INVENTORY> 4,812
<CURRENT-ASSETS> 21,995
<PP&E> 3,258
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,338
<CURRENT-LIABILITIES> 82,578
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> (56,129)
<TOTAL-LIABILITY-AND-EQUITY> 31,338
<SALES> 18,896
<TOTAL-REVENUES> 18,896
<CGS> 7,765
<TOTAL-COSTS> 8,471
<OTHER-EXPENSES> 135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,697)
<INCOME-PRETAX> 954
<INCOME-TAX> 375
<INCOME-CONTINUING> 579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
