<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
of the Securities Exchange Act of 1934
Commission
For the Quarterly Period Ended September 30, 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
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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 October 31, 2000
----- -------------------------------
Common stock, $.01 par value 475,000
<PAGE> 2
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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote
of Security Holders N/A
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
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2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
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GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
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NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1999 2000
----------------- -----------------
<S> <C> <C>
NET REVENUES
Publishing
Newsstand $28,406 $28,858
Advertising 10,208 7,297
Subscription 6,026 5,159
Other 2,118 2,577
Entertainment 12,544 12,730
----------------- -----------------
59,302 56,621
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OPERATING COSTS AND EXPENSES
Publishing-production, distribution and editorial 25,725 22,281
Entertainment- direct costs 1,512 920
Selling, general and administrative 30,710 23,745
Rent expense from affiliated companies 361 398
Depreciation and amortization 728 560
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Total operating costs and expenses 59,036 47,904
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Income from operations 266 8,717
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OTHER INCOME (EXPENSE)
Gain on sale of Automotive Group 30,734
Interest expense (6,277) (5,149)
Interest income 643 369
----------------- -----------------
Total other income (expense), net 25,100 (4,780)
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INCOME BEFORE PROVISION FOR INCOME TAXES 25,366 3,937
Provision for income taxes 1,287 1,446
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Net income before extraordinary gain 24,079 2,491
Extraordinary gain from early extinguishment of debt,
net of income taxes of $50 in 1999 641
----------------- -----------------
Net income 24,720 2,491
Accumulated deficit-beginning of period (79,493) (59,606)
----------------- -----------------
Accumulated deficit-end of period ($54,773) ($57,115)
================= =================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 2000
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<S> <C> <C>
NET REVENUES
Publishing
Newsstand $9,282 $10,178
Advertising 2,633 2,484
Subscription 1,596 1,800
Other 709 912
Entertainment 4,598 3,705
-------------- ---------------
18,818 19,079
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OPERATING COSTS AND EXPENSES
Publishing-production, distribution and editorial 8,831 7,267
Entertainment- direct costs 564 288
Selling, general and administrative 9,752 7,868
Rent expense from affiliated companies 120 127
Depreciation and amortization 217 163
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Total operating costs and expenses 19,484 15,713
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Income (loss) from operations (666) 3,366
-------------- ---------------
Other income (expense)
Gain on sale of Automotive Group
Interest expense (1,689) (1,726)
Interest income 105 107
-------------- ---------------
Total other (expense), net (1,584) (1,619)
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INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (2,250) 1,747
Provision for income taxes 640
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Net income (loss) before extraordinary gain (2,250) 1,107
Extraordinary gain from early extinguishment of debt,
net of income taxes of $50 in 1999 -
-------------- ---------------
Net income (loss) (2,250) 1,107
Accumulated deficit-beginning of period (52,523) (58,222)
-------------- ---------------
Accumulated deficit-end of period ($54,773) ($57,115)
============== ===============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
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<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------------------- ----------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
--------------
Cash and cash equivalents $5,659 $5,893
Accounts receivable, net of allowance
for doubtful accounts 6,801 3,452
Inventories 4,523 5,974
Prepaid expenses and other current assets 1,474 1,602
Due from affiliated companies 2,996 1,647
Loan to shareholder 862 987
-------------------- ----------------------
TOTAL CURRENT ASSETS 22,315 19,555
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation and amortization 3,372 3,026
OTHER ASSETS
------------
Deferred subscription aquisition costs, net 397 661
Deferred debt issuance costs, net 720 179
Loan to affiliated company 1,086 1,086
Fine arts and collectibles 470 2,270
Other 1,944 2,101
-------------------- ----------------------
4,617 6,297
-------------------- ----------------------
$30,304 $28,878
==================== ======================
LIABILITIES AND STOCKHOLDER DEFICIENCY
--------------------------------------
CURRENT LIABILITIES
-------------------
Current maturities of Senior Secured Notes $51,847 $51,962
Accounts payable 12,298 10,494
Deferred revenue 8,954 8,075
Other liabilities and accrued expenses 8,901 7,964
-------------------- ----------------------
TOTAL CURRENT LIABILITIES 82,000 78,495
UNEARNED REVENUE 2,066 1,793
OTHER NON-CURRENT LIABILITIES 1,150 1,011
CONTINGENCIES
REDEEMABLE WARRANTS 1,791 1,791
STOCKHOLDER 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) (57,115)
-------------------- ----------------------
(56,703) (54,212)
-------------------- ----------------------
$30,304 $28,878
==================== ======================
</TABLE>
SEE NOTES TO CONDENSED 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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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income $24,720 $2,491
Adjustments to reconcile net income to
cash provided by (used in) operating activities
Depreciation and amortization 728 560
Extraordinary gain from early extinguishment of debt (641)
Amortization of debt issuance costs 753 655
Gain on disposition of Automotive Magazine assets (29,447)
Income taxes reimbursable to affiliated companies 1,446
Accrued interest on loan to shareholder (51) (70)
Net change in operating assets and liabilities (2,472) (2,683)
------------------- -----------------
Net cash provided by (used in) operations (6,410) 2,399
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CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (436) (213)
------------------- -----------------
Net cash provided by (used in) investing activities 34,564 (213)
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CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Repurchase of Senior Secured Notes (26,600)
Advances to affiliated companies (1,859) (1,897)
Loan to shareholder (55)
Repayment from affiliated companies 1,556
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Net cash used in financing activities (26,903) (1,952)
------------------- -----------------
Net increase in cash and cash equivalents 1,251 234
Cash and cash equivalents at beginning of period 6,432 5,659
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Cash and cash equivalents at end of period $7,683 $5,893
=================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
Cash paid during the period for:
Interest $4,048 $3,103
Income taxes $507 $176
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
---------------------------------------------------------
Non-cash repayment by affiliated companies $1,800
</TABLE>
SEE NOTES TO CONDENSED 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 condensed
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 Article 10 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. For further information, refer to the consolidated financial
statements and footnotes thereto enclosed in General Media, Inc. and
Subsidiaries annual report on Form 10-K for the year ended December 31, 1999.
Operating results for the three months and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
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 seeking to refinance the Notes, there can be no assurance that the
Company will be able to do so. If it is not able to do so, 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 the Notes are refinanced, it is likely that the terms of the
refinancing will not 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 nine month period to achieve profitability and improve cash
flow. These actions have improved the profitability of the Company during the
nine month period, resulting in income from operations of $8,717,000, net
income of $2,491,000 and positive cash flows from operating activities of
$2,399,000. 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:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
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-------- In Thousands --------
<S> <C> <C>
Paper and printing $ 1,702 $ 2,926
Editorials and pictorial 2,295 2,400
Film and programming costs 526 648
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$ 4,523 $ 5,974
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</TABLE>
6
<PAGE> 7
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, cash 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
<PAGE> 8
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 not to exceed 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 September 30, 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 were
appraised at $1,800,000 by Sotheby's Inc.
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 operations 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. At January 1, 2000, GMI had
available for Federal income tax purposes NOL's aggregating approximately
$82,142,000. To the extent that the Company utilizes such NOL's, the Company
is required to pay GMI, within thirty days after the Company pays the group
consolidated tax liability, an amount that would have been paid in taxes had
such NOL's not been available. The Company generated approximately $3,900,000
of taxable income for the first nine months of 2000. The amount of taxes that
the Company would have paid for the nine months ended September 30, 2000 had
GMI's NOL's not been made available to the Company was approximately
$1,446,000. 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
nine months ended September 30, 2000 consists of federal income taxes of
approximately $1,290,000 and state and local income taxes of approximately
$156,000. Under the terms of the Agreement no cash has been paid by the
Company to GMI.
8
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GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
6. CONTINGENCIES
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 March
2001. 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 liquidity, financial condition or
results of operations.
There are various other lawsuits claiming amounts against the Company. It is
the opinion of the Company's management that the ultimate liabilities, if any,
in the outcome of these cases will not have a material adverse effect on the
Company's liquidity, financial condition or results of operations.
7. SEGMENT INFORMATION
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 five affiliate magazines (the
"Affiliate Publications" and, together with Penthouse magazine, the "Men's
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") and, effective December 1999, the
publication of Mind and Muscle Power Magazine. The entertainment segment of
the Company produces a number of adult-oriented entertainment products,
including pay-per-call telephone lines, video cassettes, digital video discs,
pay-per-view programming, the sale of memberships to the Company's internet
site and advertising revenue from banners posted on the internet site.
The accounting policies used to develop segment information correspond to
those disclosed in the Company's financial statements for the year ended
December 31, 1999. The Company does not allocate certain corporate expenses to
its segments. The reportable segments are distinct business units that are
separately managed with separate marketing systems.
9
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GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
7. (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE AND
RECONCILING
PUBLISHING ENTERTAINMENT ITEMS CONSOLIDATED
-----------------------------(IN THOUSANDS)----------------------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
SALES TO CUSTOMERS $43,888 $12,733 $56,621
INCOME FROM OPERATIONS 10,372 7,832 $(9,487) 8,717
IDENTIFIABLE ASSETS 15,771 1,270 11,837 28,878
DEPRECIATION AND AMORTIZATION 477 83 560
CAPITAL EXPENDITURES 144 69 213
Nine Months Ended
September 30, 1999
Sales to customers $46,758 $12,544 $59,302
Income from operations 4,539 6,448 $(10,721) 266
Identifiable assets 17,156 2,030 13,621 32,807
Depreciation and amortization 646 82 728
Capital expenditures 415 21 436
THREE MONTHS ENDED
SEPTEMBER 30, 2000
SALES TO CUSTOMERS $15,374 $3,705 $19,079
INCOME FROM OPERATIONS 4,342 1,926 $(2,902) 3,366
DEPRECIATION AND AMORTIZATION 135 28 163
CAPITAL EXPENDITURES 13 31 44
Three Months Ended
September 30, 1999
Sales to customers $14,217 $4,601 $18,818
Income (loss) from operations 386 2,715 $(3,767) (666)
Depreciation and amortization 189 28 217
Capital expenditures 261 261
</TABLE>
The loss from operations in the Corporate and reconciling items column
represents corporate administrative expenses such as executive, human
resources, finance and accounting, management information systems, and costs
related to the operation of the corporate and executive offices. Corporate and
reconciling items included in identifiable assets include all cash, deferred
debt issuance costs, loan to shareholder, loan to affiliated company and
assets held for sale.
10
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GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
7. (CONTINUED)
The market for the Company's product is worldwide; however approximately 90%
of the Company's revenue is derived from U.S.-based sources.
No customer of the Company accounted for more than five percent of the
Company's net revenue during the nine months and three months ended September
30, 2000 and 1999, and no part of the business is dependent upon a single
customer or a few customers, the loss of any one of which would have a
material adverse effect on the Company.
11
<PAGE> 12
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 the
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 targeted the men's health and fitness magazine
market. The Company plans to suspend publication of Power after the November
2000 issue due to the poor financial performance of the magazine. The
entertainment segment of the Company produces a number of adult-oriented
entertainment products, including pay-per-call telephone lines, video
cassettes, digital video discs ("DVD's"), pay-per-view programming, the sale
of memberships to the Company's internet site (the "internet site") and
advertising revenue from banners posted on the internet site.
RESULTS OF OPERATIONS (THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. 1999)
The Company's revenues were $19.1 million for the three months ended September
30, 2000, compared to revenues of $18.8 million for the three months ended
September 30, 1999, an increase of $0.3 million. Newsstand revenues were $10.2
million and $9.3 million for the three months ended September 30, 2000 and
1999, respectively, an increase of $0.9 million. Newsstand revenues for Mens
Magazines were $9.9 million and $9.3 million for the three months ended
September 30, 2000 and 1999, respectively, an increase of $0.6 million.
Newsstand revenues for Power magazine were $0.3 million for the three months
ending September 30, 2000. Advertising revenues for the publishing segment
were $2.5 million and $2.6 million for the three months ended September 30,
2000 and 1999, respectively, a decrease of $0.1 million. This decrease is due
to lower advertising revenues from Mens Magazines of $0.3 million offset by
advertising revenues from Power magazine of $0.2 million during the three
months ended September 30, 2000. Subscription revenues were $1.8 million and
$1.6 million for the three months ended September 30, 2000 and 1999,
respectively. Revenues for the Entertainment Segment were $3.7 million and
$4.6 million for the three months ended September 30, 2000 and 1999,
respectively, a decrease $0.9 million. Revenues from the Company's video
business were $0.4 million and $0.9 million for the three months ended
September 30, 2000 and 1999, respectively, a decrease of $0.5 million.
Revenues from the Company's pay-per-call business were $0.2 million and $0.4
million for the three months ended September 30, 2000 and 1999, respectively,
a decrease of $0.2 million. Revenues from the Company's internet business were
$3.1 million and $3.3 million for the three months ended September 30, 2000
and 1999, respectively, a decrease of $0.2 million.
12
<PAGE> 13
ITEM 2. (CONTINUED)
Income from operations increased $4.1 million to $3.4 million for the three
months ended September 30, 2000 from a net loss of $0.7 million for the three
months ended September 30, 1999. Income from operations was positively
impacted by:
[ ] an increase in the newsstand cover price of Penthouse Magazine,
[ ] an increase in the newsstand cover price of Variations 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,
[ ] a suspension of publication of Hot Talk in December 1999 which was
an unprofitable publication,
[ ] decreased selling, general and administrative expenses due to
decreased insurance expense, consulting fees, legal expense,
advertising expense, promotional expenses, retail display allowance
expenses and salaries, partially offset by an increase in bank
charges.
[ ] reduced salary expenses caused by a reduction in the number of
employees as a result of restructuring the Company's operations.
Net other expense was $1.6 million for the three months ended September 30,
2000 and 1999, respectively. Interest expense was $1.7 million for the three
months ended September 30, 2000 and 1999, respectively. Included in interest
expense is the amortization of debt issuance costs and discounts of $0.2
million for the three months ended September 30, 2000 and 1999, respectively.
As a result of the above discussed factors, net income before provision for
income taxes for the three months ended September 30, 2000 was $1.7 million,
compared to a net loss of $2.3 million, for an improvement of $4.0 million.
The net revenues and income from operations of the Company were (in millions):
<TABLE>
<CAPTION>
Income
Net Revenue From Operations
-------------- ---------------
Three Three
Months Ended Months Ended
September 30, September 30,
--------------- --------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Publishing Segment $14.2 $15.4 $0.4 $4.3
Entertainment Segment 4.6 3.7 2.7 2.0
----- ----- ----- ----
18.8 19.1 3.1 6.3
Corporate Administrative Expenses (3.8) (2.9)
----- ----- ------ ----
$18.8 $19.1 $(0.7) $3.4
===== ===== ====== ====
</TABLE>
13
<PAGE> 14
ITEM 2. (CONTINUED)
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were (in
millions):
<TABLE>
<CAPTION>
Income (Loss)
Net Revenues From Operations
------------ ---------------
Three Three
Months Ended Months Ended
September 30, September 30,
---------------- --------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $13.7 $14.4 $ $4.0
International edition licensing 0.5 0.5 0.4 0.4
Power Magazine 0.5 (0.1)
----- ------ ---- -----
$14.2 $15.4 $0.4 $4.3
===== ====== ==== ====
</TABLE>
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $14.4
million and $13.7 million for the three months ended September 30, 2000 and
1999, respectively. Newsstand revenue was $9.9 million and $9.2 million for
the three months ended September 30, 2000 and 1999, respectively, an increase
of $0.7 million. The increase is primarily attributable to an increase in the
cover price of Penthouse magazine offset by a decrease in the number of copies
of Penthouse magazine sold and revenue lost due to the suspension of
publication of Hot Talk magazine effective December 1999. Advertising revenue
was $2.2 million and $2.6 million for the three months ended September 30,
2000 and 1999, respectively, a decrease of $0.4 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. Subscription revenue was $1.8 million and $1.6 million for the
three months ended September 30, 2000 and 1999, respectively. The increase is
attributable to an increase in the subscription price of Penthouse magazine
partially offset by a decrease in the number of subscriptions sold.
Publishing, production, distribution and editorial expenses were $6.8 million
and $8.8 million for the three months ended September 30, 2000 and 1999,
respectively, a decrease of $2.0 million. Paper costs were $2.9 million for
the three months ended September 30, 2000, compared to $3.3 million for the
three months ended September 30, 1999, a decrease of $0.4 million. The
decrease is due primarily to a decrease in the number of copies printed and a
decrease in the number of pages per issue. Print costs were $2.2 million for
the three months ended September 30, 2000, compared to $3.1 million for the
three months ended September 30, 1999, a decrease of $0.9 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 $1.0 million for the three months ended September 30, 2000 compared
to $1.3 million for the three months ended September 30, 1999, a decrease of
$0.3 million. Editorial costs were $0.7 million and $1.0 million for the three
months ended September 30, 2000 and 1999, respectively, a decrease of $0.3
million.
14
<PAGE> 15
ITEM 2. (CONTINUED)
Selling, general and administrative expenses were $3.4 million for the three
months ended September 30, 2000, compared to $4.8 million for the three months
ended September 30, 1999, a decrease of $1.4 million. The decrease is
primarily due to decreased insurance expense of $0.5 million, decreased legal
expense of $0.5 million, decreased advertising expense of $0.4 million and
decreased subscription acquisition costs of $0.2 million as a result of fewer
direct subscription mailings, partially offset by an increase in bad debt
expense of $0.2 million, during the three months ended September 30, 2000.
INTERNATIONAL EDITION LICENSING
Revenues from licensing of international editions, which are included in other
revenue, were $0.5 million for the three months ended September 30, 2000 and
1999, respectively.
POWER MAGAZINE
Revenues from Power magazine during the three months ended September 30, 2000
were $0.5 million. Newsstand and subscription revenues were $0.3 million and
advertising revenue was $0.2 million.
Publishing-production, distribution and editorial expenses were $0.5 million
for the three months ended September 30, 2000.
Selling, general and administrative expenses were $0.2 million for the three
months ended September 30, 2000.
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $3.7 million for the three months
ended September 30, 2000, compared to $4.6 million for the three months ended
September 30, 1999, a decrease of $0.9 million. The Company's video business
revenues were $0.4 million for the three months ended September 30, 2000,
compared to $0.9 million for the three months ended September 30, 1999, a
decrease of $0.5 million. Revenues for the third quarter of 2000 were lower
due to lower sales of video cassettes as a result of a disruption in the sales
channel caused by a change to a new national wholesale distributor and lower
revenue from pay-per-view. Revenues from the Company's pay-per-call business
were $0.2 million and $0.3 million for the three months ended September 30,
2000 and 1999, respectively, a decrease of $0.1 million. Revenues for the
third 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 $3.3 million for the three months ended
September 30, 2000 and 1999, respectively, a decrease of $0.2 million. The
decrease is primarily attributable to lower sales of memberships to the
Company's internet site, partially offset by advertising revenues from banners
on the internet site of $0.1 million for the three months ended September 30,
2000. The Company experienced a decline in new members due to its use of more
aggressive scrubbing methods in order to comply with Visa and MasterCard's
more stringent requirements regarding chargeback levels. Memberships were
further impacted by the decision of American Express to withdraw from the
adult entertainment business, which eliminated one possible payment option for
customers. To attempt to offset this decline, the Company intends to increase
its marketing efforts and offer promotional incentives to attract new
customers.
Direct costs were $0.3 million for the three months ended September 30, 2000,
compared to $0.6 million for the three months ended September 30, 1999, a
decrease of $0.3 million which is primarily attributable to lower costs due to
a change to a new national wholesale distributor of video cassettes and DVD's.
15
<PAGE> 16
ITEM 2. (CONTINUED)
Selling, general and administrative expenses were $1.4 million and $1.3
million for the three months ended September 30, 2000 and 1999, respectively,
an increase of $0.1 million. The increase is due primarily to higher bank
charges and salaries relating to the internet, partially offset by lower
negotiated web hosting costs and lower consulting expenses relating to the
internet. 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 include 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 $2.8 million for the three months ended
September 30, 2000, compared to $3.8 million for the three months ended
September 30, 1999, a decrease of $1.0 million. The decrease is primarily due
to a decrease in insurance expense of $0.5 million, a decrease in legal fees
of $0.3 million and a decrease in consulting fees of $0.2 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 September 30, 2000 and 1999.
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. 1999)
The Company's revenues were $56.6 million for the nine months ended September
30, 2000, compared to revenues of $59.3 million for the nine months ended
September 30, 1999, a decrease of $2.7 million. Included in the $59.3 million
of revenue for the nine months ended September 30, 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 $2.2 million.
Newsstand revenues were $28.9 million and $28.4 million for the nine months
ended September 30, 2000 and 1999, respectively, an increase of $0.5 million.
Included in the $28.4 million of newsstand revenues for the nine months ended
September 30, 1999 is $1.0 million of revenues from the Automotive Magazines.
After giving effect to the sale of the Automotive Magazines, the Company's
newsstand revenues increased by $1.5 million. Newsstand revenues for Mens
Magazines were $28.3 million and $27.4 million for the nine months ended
September 30, 2000 and 1999, respectively, an increase of $0.9 million.
Newsstand revenues for Power magazine were $0.5 million for the nine months
ending September 30, 2000. Advertising revenues for the publishing segment
were $7.3 million and $10.2 million for the nine months ended September 30,
2000 and 1999, respectively, a decrease of $2.9 million. Of this amount, $3.0
million is attributable to a loss of advertising revenue from the sale of the
Automotive Magazines. After giving effect to the sale of the Automotive
Magazines, the Company's advertising revenues increased by $0.1 million.
Advertising revenues from Power magazine was $0.6 million, which was partially
offset by a decrease in advertising revenues from the Mens Magazines of $0.5
million during the nine months ended September 30, 2000. Subscription revenues
were $5.2 million and $6.0 million for the nine months ended September 30,
2000 and 1999, respectively, a decrease of $0.8 million, which is primarily
attributable to the sale of the Automotive Magazines. Revenues for the
Entertainment Segment were $12.7 million and $12.5 million for the nine months
ended September 30, 2000 and 1999, respectively, an increase of $0.2 million.
Revenues from the Company's
16
<PAGE> 17
ITEM 2. (CONTINUED)
video business were $1.9 million and $2.1 million for the nine months ended
September 30, 2000 and 1999, respectively, a decrease of $0.2 million.
Revenues from the Company's pay-per-call business were $0.9 million and $1.1
million for the nine months ended September 30, 2000 and 1999, respectively, a
decrease of $0.2 million. Revenues from the Company's internet business were
$9.9 million and $9.3 million for the nine months ended September 30, 2000 and
1999, respectively, an increase of $0.6 million, of which $0.3 is attributable
to internet advertising revenue.
Income from operations increased $8.4 million to $8.7 million for the nine
months ended September 30, 2000, from $0.3 million for the nine months ended
September 30, 1999. Income from operations was positively impacted by:
[ ] an increase in the newsstand cover price of Penthouse Magazine,
[ ] an increase in the newsstand cover price of Variations 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 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,
[ ] increased revenue from advertising banners on the Company's internet
site
[ ] a suspension of 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,
insurance expense, advertising expense, web hosting costs and
[ ] reduced salary expenses caused by a reduction in the number of
employees as a result of restructuring the Company's operations.
Net other expense for the nine months ended September 30, 2000 was $4.8
million, compared to net other income of $25.1 million for the nine months
ended September 30, 1999. Included in net other income for the nine months
ended September 30, 1999 is a before tax gain of $30.7 million from the sale
of the Automotive Magazines. Interest expense for the nine months ended
September 30, 2000 was $5.1 million, compared to interest expense of $6.3
million for the nine months ended September 30, 1999. The decrease in interest
expense is a result of the repurchase of the principal amount of $28.0 million
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 $0.5 million and
$0.6 million for the nine months ended September 30, 2000 and 1999,
respectively.
As a result of the above discussed factors, net income for the nine months
ended September 30, 2000 was $2.5 million, compared to net income of $24.7
million for the nine months ended September 30, 1999. Included
17
<PAGE> 18
ITEM 2. (CONTINUED)
in the net income of $24.7 million for the nine months ended September 30,
1999 is an extraordinary gain of $0.6 million from the early extinguishment of
debt and a net gain of $29.5 million from the sale of the Automotive Magazines
for $30.7 million, less related taxes of $1.2 million, for a net loss of $5.4
million for the nine months ended September 30, 1999 had these items been
excluded. Compared to this $5.4 million net loss, the net income of $2.5
million for the nine months ended September 30, 2000 was $7.9 million higher
than the prior period.
The net revenues and income from operations of the Company were (in millions):
<TABLE>
<CAPTION>
Income
Net Revenue From Operations
------------- ---------------
Nine Nine
Months Ended Months Ended
September 30, September 30,
--------------- --------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Publishing Segment $46.8 $43.9 $4.5 $10.4
Entertainment Segment 12.5 12.7 6.5 7.8
------ ------ ------ ------
59.3 56.6 11.0 18.2
Corporate Administrative Expenses (10.7) (9.5)
------ ------- ------ ------
$59.3 $56.6 $0.3 $8.7
===== ===== ==== ====
</TABLE>
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were (in
millions):
<TABLE>
<CAPTION>
Income (Loss)
Net Revenues From Operations
------------ ---------------
Nine Nine
Months Ended Months Ended
September 30, September 30,
-------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $40.4 $41.1 $2.8 $9.7
International edition licensing 1.5 1.6 1.2 1.3
Power Magazine 1.2 (0.6)
Automotive Magazines 4.9 0.5
----- ------- ----- ------
$46.8 $43.9 $4.5 $10.4
===== ====== ==== ======
</TABLE>
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $41.1
million and $40.4 million for the nine months ended September 30, 2000 and
1999, respectively, an increase of $0.7 million. Newsstand revenue was $28.3
million and $27.4 million for the nine months ended September 30, 2000 and
1999, respectively, an increase of $0.9 million. The increase is primarily
attributable to an increase in the cover price of Penthouse magazine, offset
by a decrease in the number of copies of Penthouse sold and revenue lost due
to the suspension of publication of Hot Talk magazine effective December 1999.
Advertising revenue was $6.7 million and $7.2
18
<PAGE> 19
ITEM 2. (CONTINUED)
million for the nine months ended September 30, 2000 and 1999, respectively, a
decrease of $0.5 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 $5.1 million and $5.2 million for the nine months ended September
30, 2000 and 1999, respectively, a decrease of $0.1 million which was
primarily due 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
nine months ended September 30, 2000.
Publishing-production, distribution and editorial expenses were $21.1 million
and $23.2 million for the nine months ended September 30, 2000 and 1999,
respectively, a decrease of $2.1 million. Paper costs were $8.6 million for
the nine months ended September 30, 2000 and 1999. Although the cost remained
the same, there was an increase in the cost of paper which was offset by a
decrease in the number of copies printed and a decrease in the number of pages
per issue. Print costs were $7.1 million for the nine months ended September
30, 2000, compared to $8.5 million for the nine months ended September 30,
1999, a decrease of $1.4 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 $3.2 million and $3.6 million for
the nine months ended September 30, 2000 and 1999 respectively, a decrease of
$0.4 million. Editorial costs were $2.3 million and $2.6 million for the nine
months ended September 30, 2000 and 1999, respectively, a decrease of $0.3
million.
Selling, general and administrative expenses were $10.3 million for the nine
months ended September 30, 2000, compared to $14.2 million for the nine months
ended September 30, 1999, a decrease of $3.9 million. The decrease is
primarily due to decreased subscription costs of $1.1 million as a result of
fewer direct subscription mailings, decreased promotional expense of $0.6
million, decreased salary expense of $0.6 million, decreased insurance expense
of $0.5 million, decreased advertising expense of $0.5 million, decreased
commission expense of $0.3 million and decreased retail distribution allowance
expense of $0.1 million during the nine months ended September 30, 2000.
INTERNATIONAL EDITION LICENSING
Revenues from licensing of international editions, which are included in other
revenue, were $1.6 million and $1.5 million for the nine months ended
September 30, 2000 and 1999, respectively.
POWER MAGAZINE
Revenues from Power magazine during the nine months ended September 30, 2000
were $1.2 million. Newsstand and subscription revenues were $0.6 million and
advertising revenue was $0.6 million.
Publishing-production, distribution and editorial expenses were $1.1 million
for the nine months ended September 30, 2000.
Selling, general and administrative expenses were $0.6 million for the nine
months ended September 30, 2000.
19
<PAGE> 20
ITEM 2. (CONTINUED)
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $12.7 million for the nine months
ended September 30, 2000, compared to $12.5 million for the nine months ended
September 30, 1999, an increase of $0.2 million. The Company's video business
revenues were $1.9 million for the nine months ended September 30, 2000,
compared to $2.1 million for the nine months ended September 30, 1999, a
decrease of $0.2 million. The decrease was primarily due to lower sales of
video cassettes during the nine months ended September 30, 2000 as a result of
a disruption in the sales channel caused by a change to a new national
wholesale distributor and lower revenue from pay-per-view. Revenues from the
Company's pay-per-call business were $0.9 million and $1.1 million for the
nine months ended September 30, 2000 and 1999, respectively, a decrease of
$0.2 million. Revenues for the first nine months 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 $9.9 million and $9.3
million for the nine months ended September 30, 2000 and 1999, respectively,
an increase of $0.6 million. The increase is primarily attributable to lower
chargebacks and revenue from the sale of advertising banners on its internet
site. Visa and MasterCard continue to impose more stringent requirements
regarding chargebacks on the adult entertainment industry. To comply with Visa
and MasterCard's requirements, the Company has implemented more aggressive
scrubbing methods during the current quarter to further reduce its chargeback
levels. These actions, together with the decision of American Express to
withdraw from the adult entertainment business, have negatively impacted
revenues from new memberships. To attempt to offset this decline the Company
intends to intensify its marketing efforts and to offer more promotional
incentives in order to increase memberships. Advertising revenues from banners
on the internet site were $0.3 million for the nine months ended September 30,
2000.
Direct costs were $0.9 million for the nine months ended September 30, 2000,
compared to $1.5 million for the nine months ended September 30, 1999, a
decrease of $0.6 million which is primarily attributable to lower costs due to
the change to a new national wholesale distributor of DVD's and video
cassettes.
Selling, general and administrative expenses were $4.0 million and $4.6
million for the nine months ended September 30, 2000 and 1999, respectively, a
decrease of $0.6 million. The decrease is primarily attributable to lower
negotiated web hosting costs and lower consulting expenses related to the
internet, partially offset by higher bank charges related to the internet.
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 $9.5 million for the nine months ended
September 30, 2000, compared to $10.7 million for the nine months ended
September 30, 1999, a decrease of $1.2 million. This decrease is primarily
attributable to decreased expenses of $0.1 million as a result of the sale of
the Automotive Magazines, decreased consulting fees of $0.5 million, decreased
insurance expense of $0.5 million and decreased salary expenses of $0.3
million, offset by an increase of $0.2 million in various other corporate
administrative expenses.
20
<PAGE> 21
ITEM 2. (CONTINUED)
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 $0.4 million for the
nine months ended September 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had $5.9 million in cash and cash
equivalents, compared to $5.7 million at December 31, 1999. The increase in
cash and cash equivalents during the nine months ended September 30, 2000,
resulted from cash flows provided by operating activities of $2.4 million,
offset by cash flows used in investing activities of $0.2 million and cash
flows used in financing activities of $2.0 million.
Cash flows from operating activities
Net cash provided by operating activities was $2.4 million for the nine
months ended September 30, 2000, compared to net cash used in operating
activities of $6.4 million for the nine months ended September 30, 1999, an
improvement of $8.8 million. Net cash provided by operating activities for
the nine months ended September 30, 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 whereby an
advance of approximately $1.9 million was not received until January 2000,
improved collections of advertising accounts receivable and the resolution
of several collection problems during the current year, partially offset by
decreased accounts payable and accrued expenses due to the timing of
payments to vendors, and by higher paper inventory levels as a result of a
purchase of $1.2 million of paper in September 2000 which is expected to be
used to produce magazines in the fourth quarter of 2000 and the purchase of
$0.1 million of higher priced pictorial content which will be used in
magazines which will go on sale in the fourth quarter of 2000. The purchase
of paper was made to take advantage of discounted prices and favorable
credit terms offered by one of the Company's paper suppliers. Net cash used
in operating activities for the nine months ended September 30, 1999 was
primarily the result of a loss from operations for the period after
excluding the gain on the sale of the automotive group and decreased
accounts payable balances due to the timing of payments to vendors.
Cash flows from investing activities
Cash used in investing activities was $0.2 million for the nine months
ended September 30, 2000, compared to net cash provided by investing
activities of $34.6 million for the nine months ended September 30, 1999.
Cash used in investing activities for the nine months ended September 30,
2000 was the result of capital expenditures of $0.2 million. Cash provided
by investing activities for the nine months ended September 30, 1999 was
the result of the sale of the Automotive Magazines for $35.0 million,
offset by capital expenditures of $0.4 million.
Cash flows from financing activities
Cash flows used in financing activities were $2.0 million for the nine
months ended September 30, 2000, compared to cash flows used in financing
activities of $26.9 million for the nine months ended September 30, 1999.
Affiliated company advances at September 30, 2000 decreased $1.3 million
from the December 31, 1999 balance, whereby the Company is owed $1.6
million by GMI as of September 30, 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
21
<PAGE> 22
ITEM 2. (CONTINUED)
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. 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 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 September 30, 2000, the
Company has a loan outstanding to the principal shareholder of GMI of
$987,000. 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 $5.9 million at September 30, 2000 compared to
$5.7 million at December 31, 1999. During the nine months ended September 30,
2000, the Company provided $2.4 million in cash flow from operating
activities. On December 31, 2000 the $52.0 million principal amount of the
Company's Notes comes due along with a $2.8 million semiannual interest
payment. Although the Company is actively seeking to refinance the Notes,
there can be no assurance that the Company will be able to do so. While cash
on hand and cash generated from operations are anticipated to be sufficient to
cover the interest payment, 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 the Notes are
refinanced, it is likely that the terms of the refinancing will not 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 nine month period to achieve profitability and improve cash
flow. These actions have improved the profitability of the Company during the
current nine month period, resulting in income from operations of $8.7
million, net income of $2.5 million and positive cash flows from operations of
$2.4 million for the nine months ended September 30, 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
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ITEM 2. (CONTINUED)
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates.
Management does not believe that it has any foreign currency rate risk.
Interest Rates-As of September 30, 2000, the Company had debt of $52.0 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 March
2001. 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 liquidity, financial condition or
results of operations.
ITEM 5. OTHER INFORMATION
Robert C. Guccione, who is a Director, Chairman of the Board, Publisher and
Chief Executive Officer of the Company, has been diagnosed with cancer of the
tongue and larynx. He has recently completed a course of treatment for this
disease.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed in the "Exhibit Index" are
filed as part of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended September 30, 2000.
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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: October 31, 2000 By: /s/ John D. Orlando
----------------------------------
Signature
John D. Orlando
Senior Vice President-Chief
Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Item
27 Financial Data Schedule
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