<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 June 30, 2000 File No. 33-76716
------- --------
General Media, Inc.
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3750988
---------------------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
11 Penn Plaza, New York, NY 10001
-------------------------------- ----------------------
(Address of Principal Executive Zip Code
Offices)
(212) 702-6000
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at July 21, 2000
----- ----------------------------
<S> <C>
Common stock, $.01 par value 475,000
</TABLE>
<PAGE> 2
GENERAL MEDIA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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 19
PART II- OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote
of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------
1999 2000 1999 2000
-------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Publishing
Newsstand $19,124 $18,680 $8,880 $8,804
Advertising 7,575 4,813 2,085 2,368
Subscription 4,430 3,359 1,716 1,678
Other 1,409 1,665 736 843
Entertainment 7,946 9,025 4,288 4,953
-------------- ------------- ----------- -----------
40,484 37,542 17,705 18,646
-------------- ------------- ----------- -----------
OPERATING COSTS AND EXPENSES
Publishing-production, distribution and editorial 16,894 15,014 6,939 7,550
Entertainment- direct costs 948 632 514 331
Selling, general and administrative 20,958 15,877 9,038 7,619
Rent expense from affiliated companies 241 271 108 136
Depreciation and amortization 511 397 198 184
-------------- ------------- ----------- -----------
Total operating costs and expenses 39,552 32,191 16,797 15,820
-------------- ------------- ----------- -----------
Income from operations 932 5,351 908 2,826
-------------- ------------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on sale of Automotive Group 30,734
Interest expense (4,588) (3,423) (2,108) (1,726)
Interest income 538 262 313 136
-------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 27,616 2,190 (887) 1,236
Income taxes 1,287 806 431
-------------- ------------- ----------- -----------
Net income (loss) before extraordinary gain 26,329 1,384 (887) 805
Extraordinary gain from early extinguishment of debt,
net of income taxes of $50 in 1999 641 641
-------------- ------------- ----------- -----------
Net income (loss) 26,970 1,384 (246) 805
Accumulated deficit-beginning of period (79,493) (59,606) (52,277) (59,027)
-------------- ------------- ----------- -----------
Accumulated deficit-end of period ($52,523) ($58,222) ($52,523) ($58,222)
============== ============= =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
-------------------- -------------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
--------------
Cash and cash equivalents $5,659 $4,861
Accounts receivable, net of allowance
for doubtful accounts 6,801 3,750
Inventories 4,523 4,648
Prepaid expenses and other current assets 1,474 1,545
Due from affiliated companies 2,996 2,369
Loan to shareholder 862 964
-------------------- -------------------
TOTAL CURRENT ASSETS 22,315 18,137
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation and amortization 3,372 3,145
OTHER ASSETS
------------
Deferred subscription aquisition costs, net 397 533
Deferred debt issuance costs, net 720 359
Loan to affiliated company 1,086 1,086
Fine Arts and collectibles 470 2,270
Other 1,944 1,813
-------------------- -------------------
4,617 6,061
-------------------- -------------------
$30,304 $27,343
==================== ===================
LIABILITIES AND STOCKHOLDER DEFICIENCY
--------------------------------------
CURRENT LIABILITIES
-------------------
Current Maturities of Senior Secured Notes $51,847 $51,923
Accounts payable 12,298 10,978
Deferred revenue 8,954 8,074
Other liabilities and accrued expenses 8,901 6,908
-------------------- -------------------
TOTAL CURRENT LIABILITIES 82,000 77,883
UNEARNED REVENUE 2,066 1,930
OTHER NON-CURRENT LIABILITIES 1,150 1,058
COMMITMENTS AND 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) (58,222)
-------------------- -------------------
(56,703) (55,319)
-------------------- -------------------
$30,304 $27,343
==================== ===================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------------------
1999 2000
----------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income $26,970 $1,384
Adjustments to reconcile net income to
cash provided by (used in) operating activities
Depreciation and amortization 511 397
Extraordinary gain from early extinguishment of debt (641)
Amortization of debt issuance costs and discounts 535 437
Gain on disposition of Automotive Magazine assets (30,734)
Income taxes payable to affiliated companies 806
Accrued interest on loan to shareholder (24) (47)
Net change in operating assets and liabilities (5,361) (1,571)
----------------- ---------------
Net cash provided by (used in) operations (8,744) 1,406
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (148) (170)
----------------- ---------------
Net cash provided by (used in) investing activities 34,852 (170)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Repurchase of Senior Secured Notes (26,600)
Advances to affiliated companies (595) (1,979)
Loan to Shareholder (55)
----------------- ---------------
Net cash used in financing activities (27,195) (2,034)
----------------- ---------------
Net decrease in cash and cash equivalents (1,087) (798)
Cash and cash equivalents at beginning of period 6,432 5,659
----------------- ---------------
Cash and cash equivalents at end of period $5,345 $4,861
================= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
Cash paid during the period for:
Interest $4,048 $2,916
Income Taxes $507 $157
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 such funding
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 six month period to achieve profitability and improve cash flow.
These actions have improved the profitability of the Company during the six
month period, resulting in income from operations of $5,351,000, net income of
$1,384,000 and positive cash flows from operations of $1,406,000. Further
actions are currently under way and planned for the future to continue the
improvement in the Company's profitability and cash.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ---------------
-------- In Thousands --------
<S> <C> <C>
Paper and printing $ 1,702 $ 1,808
Editorials and pictorial 2,295 2,202
Film and programming costs 526 638
------------ ----------------
$ 4,523 $ 4,648
============ ================
</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 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 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 June 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 subsidary 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 $2.2 million of taxable income
for the first six months of 2000. The amount of taxes that the Company would
have paid for the six months ended June 30, 2000 had GMI's NOL's not been made
available to the Company was approximately $806,000. 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 six months ended June 30, 2000 consists of
federal income taxes of approximately $690,000 and state income taxes of
approximately $116,000. Under the terms of the Agreement no cash has been paid
by the Company to GMI.
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 financial position 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 effect on the Company's
financial statements.
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. Subsequent
issues of Power went on sale in March, April and May of 2000. 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 JUNE 30, 2000 VS. 1999)
The Company's revenues were $18.6 million for the three months ended June 30,
2000, compared to revenues of $17.7 million for the three months ended June 30,
1999, an increase of $0.9 million. Newsstand revenues were $8.8 million and $8.9
million for the three months ended June 30, 2000 and 1999, respectively, a
decrease of $0.1 million. Newsstand revenues for Mens Magazines were $8.7
million and $8.9 million for the three months ended June 30, 2000 and 1999,
respectively, a decrease of $0.2 million. Newsstand revenues for Power Magazine
were $0.1 million for the three months ending June 30, 2000. Advertising
revenues for the publishing segment were $2.4 million and $2.1 million for the
three months ended June 30, 2000 and 1999, respectively, an increase of $0.3
million. This increase is due to higher advertising revenues from Mens Magazines
of $0.1 million and advertising revenues from Power magazine of $0.2 million
during the three months ended June 30, 2000. Subscription revenues were $1.7
million for the three months ended June 30, 2000 and 1999, respectively.
Revenues for the Entertainment Segment were $4.9 million and $4.3 million for
the three months ended June 30, 2000 and 1999, respectively, an increase of $0.6
million. Revenues from the Company's video business were $0.9 million and $0.6
million for the three months ended June 30, 2000 and 1999, respectively, an
increase of $0.3 million. Revenues from the Company's pay-per-call business were
$0.3 million and $0.4 million for the three months ended June 30, 2000 and 1999,
respectively, a decrease of $0.1 million. Revenues from the Company's internet
business were $3.8 million and $3.4 million for the three months ended June 30,
2000 and 1999, respectively, an increase of $0.4 million.
9
<PAGE> 10
ITEM 2. (CONTINUED)
Income from operations increased $1.9 million to $2.8 million for the three
months ended June 30, 2000 from $0.9 million for the three months ended June 30,
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 revenue from the Company's video business due to contracts
with a new national 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,
[ ] increased revenue from advertising banners on the Company's internet
site,
[ ] suspended publication of Hot Talk in December 1999 which was an
unprofitable publication,
[ ] decreased selling, general and administrative expenses due to decreased
consulting fees, promotional expenses, retail display allowance
expenses, 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 June 30, 2000 was $1.6
million, compared to net non-operating expense of $1.8 million for the three
months ended June 30, 1999. Interest expense for the three months ended June 30,
2000 was $1.7 million, compared to interest expense of $2.1 million for the
three months ended June 30, 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 for the three months ended
June 30, 2000 and 1999, respectively.
As a result of the above discussed factors, net income for the three months
ended June 30, 2000 was $0.8 million, compared to a net loss of $0.9 million,
for an improvement of $1.7 million before giving effect to a gain of $0.6
million, net of taxes, from the early extinguishment of debt, which when
included resulted in a net loss of $0.2 million for the three months ended June
30, 1999.
10
<PAGE> 11
ITEM 2. (CONTINUED)
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
June 30, June 30,
--------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Publishing Segment $13.4 $13.7 $1.7 $2.9
Entertainment Segment 4.3 4.9 2.2 3.3
----- ----- ----- -----
$17.7 $18.6 $3.9 $6.2
Corporate Administrative Expenses (3.0) (3.4)
----- ----- ----- -----
$17.7 $18.6 $0.9 $2.8
===== ===== ==== ====
</TABLE>
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were (in
millions):
<TABLE>
<CAPTION>
Income
Net Revenues From Operations
------------ ---------------
Three Three
Months Ended Months Ended
June 30, June 30,
--------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $12.9 $12.9 $1.3 $2.9
International edition licensing 0.5 0.5 0.4 0.4
Power Magazine 0.0 0.3 0.0 (0.4)
Automotive Magazines 0.0 0.0 0.0 0.0
------ ------ ------ ------
$13.4 $13.7 $1.7 $2.9
====== ====== ====== ======
</TABLE>
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $12.9
million for the three months ended June 30, 2000 and 1999, respectively.
Newsstand revenue was $8.7 million and $8.9 million for the three months ended
June 30, 2000 and 1999, respectively, a decrease of $0.2 million. The decrease
is primarily attributable to a decrease in the number of copies of Penthouse
magazine sold, offset by an increase in the cover price of Penthouse magazine
and revenue lost due to the suspension of publication of Hot Talk magazine
effective December 1999. Advertising revenue was $2.2 million and $2.1 million
for the three months ended June 30, 2000 and 1999, respectively, an increase of
$0.1 million. The increase in advertising revenue is primarily attributable to
an increase in the average advertising rate per page in Penthouse and the
Affiliate Publications, partially offset by a decrease in the number of
advertising pages sold in these publications. Subscription revenue was $1.7
million for the three months ended June 30, 2000 and 1999, respectively.
11
<PAGE> 12
ITEM 2. (CONTINUED)
Publishing-production, distribution and editorial expenses were $7.1 million and
$6.9 million for the three months ended June 30, 2000 and 1999, respectively, an
increase of $0.2 million. Paper costs were $2.8 million for the three months
ended June 30, 2000, compared to $2.4 million for the three months ended June
30, 1999, an increase of $0.4 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 $2.4 million for the three months ended June 30, 2000, compared to
$2.7 million for the three months ended June 30, 1999, a decrease of $0.3
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 for the three months ended June 30, 2000
and 1999, respectively. Editorial costs were $0.8 million and $0.7 million for
the three months ended June 31, 2000 and 1999, respectively, an increase of $0.1
million.
Selling, general and administrative expenses were $3.0 million for the three
months ended June 30, 2000, compared to $4.5 million for the three months ended
June 30, 1999, a decrease of $1.5 million. The decrease is primarily due to
decreased subscription acquisition costs of $0.4 million as a result of fewer
direct subscription mailings, decreased retail distribution allowance expenses
of $0.3 million, decreased salaries of $0.5 million, and decreased consulting
expenses of $0.2 million during the three months ended June 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 June 30, 2000 and 1999,
respectively.
POWER MAGAZINE
There were two issues (May & June 2000) of Power Magazine during the three
months ended June 30, 2000. Revenues from these issues were $0.3 million.
Newsstand and subscription revenues were $0.1 million and advertising revenue
was $0.2 million.
Publishing-production, distribution and editorial expenses were $0.5 million for
the three months ended June 30, 2000.
Selling, general and administrative expenses were $0.2 million for the three
months ended June 30, 2000.
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $4.9 million for the three months
ended June 30, 2000, compared to $4.3 million for the three months ended June
30, 1999, an increase of $0.6 million. The Company's video business revenues
were $0.9 million for the three months ended June 30, 2000, compared to $0.6
million for the three months ended June 30, 1999, an increase of $0.3 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 June 30, 2000 and 1999, respectively, a decrease of $0.1 million.
Revenues for the second quarter of 2000 were lower due to higher chargeback and
reserve rates, lower billable minutes and the termination of certain contracts
with respect
12
<PAGE> 13
ITEM 2. (CONTINUED)
to the Company's smaller service bureaus. The Company's internet business
revenues were $3.8 million and $3.4 million for the three months ended June 30,
2000 and 1999, respectively, an increase of $0.4 million. The increase is
primarily attributable to lower chargebacks and revenue from the sale of
advertising banners on its internet site. The Company has lowered 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. Advertising revenues
from banners on the internet site were $0.1 million for the three months ended
June 30, 2000.
Direct costs were $0.3 million for the three months ended June 30, 2000,
compared to $0.5 million for the three months ended June 30, 1999, a decrease of
$0.2 million. The decrease is primarily attributable to $0.2 million of lower
costs due to the change to a new national wholesale DVD distributor.
Selling, general and administrative expenses were $1.3 million and $1.6 million
for the three months ended June 30, 2000 and 1999, respectively, a decrease of
$0.3 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 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 $3.4 million for the three months ended
June 30, 2000, compared to $3.0 million for the three months ended June 30,
1999, an increase of $0.4 million. The increase is primarily due to an increase
in legal fees of $0.3 million. Of this amount, $0.2 million is due to a
favorable legal settlement, which reduced expenses during the three months ended
June 30, 1999 and $0.1 million was due to increased legal fees during the three
months ended June 30, 2000.
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 June 30, 2000 and 1999.
RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2000 VS. 1999)
The Company's revenues were $37.5 million for the six months ended June 30,
2000, compared to revenues of $40.5 million for the six months ended June 30,
1999, a decrease of $3.0 million. Included in the $40.5 million of revenue for
the six months ended June 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 $1.9 million. Newsstand revenues
were $18.7 million and $19.1 million for the six months ended June 30, 2000 and
1999, respectively, a decrease of $0.4 million. Included in the $19.1 million of
newsstand revenues for the six months ended June 30, 1999 is $1.0 million of
revenues from the Automotive Magazines. After giving effect
13
<PAGE> 14
ITEM 2. (CONTINUED)
to the sale of the Automotive Magazines, the Company's revenues increased by
$0.6 million. Newsstand revenues for Mens Magazines were $18.4 million and $18.1
million for the six months ended June 30, 2000 and 1999, respectively, an
increase of $0.3 million. Newsstand revenues for Power Magazine were $0.3
million for the six months ending June 30, 2000. Advertising revenues for the
publishing segment were $4.8 million and $7.6 million for the six months ended
June 30, 2000 and 1999, respectively, a decrease of $2.8 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 $0.1 million, which was offset by advertising revenues from Power
Magazine of $0.3 million during the six months ended June 30, 2000. Subscription
revenues were $3.4 million and $4.4 million for the six months ended June 30,
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 $9.0 million and $7.9 million for
the six months ended June 30, 2000 and 1999, respectively, an increase of $1.1
million. Revenues from the Company's video business were $1.6 million and $1.2
million for the six months ended June 30, 2000 and 1999, respectively, an
increase of $0.4 million. Revenues from the Company's pay-per-call business were
$0.6 million and $0.8 million for the six months ended June 30, 2000 and 1999,
respectively, a decrease of $0.2 million. Revenues from the Company's internet
business were $6.8 million and $6.0 million for the six months ended June 30,
2000 and 1999, respectively, an increase of $0.8 million.
Income from operations increased $4.5 million to $5.4 million for the six months
ended June 30, 2000, from $0.9 million for the six months ended June 30, 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 revenue from the Company's video business due to contracts
with a new national 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,
[ ] increased revenue from advertising banners on the Company's internet
site
[ ] 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.
14
<PAGE> 15
ITEM 2. (CONTINUED)
Net non-operating expense for the six months ended June 30, 2000 was $3.2
million, compared to net non-operating income of $26.7 million for the six
months ended June 30, 1999. Included in non-operating income for the six months
ended June 30, 1999 is a before tax gain of $30.7 million from the sale of the
Automotive Magazines. Interest expense for the six months ended June 30, 2000
was $3.4 million, compared to interest expense of $4.6 million for the six
months ended June 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 $0.4 million and $0.5 million for the six months
ended June 30, 2000 and 1999, respectively.
As a result of the above discussed factors, net income for the six months ended
June 30, 2000 increased by $4.5 million to $1.4 million, from a net loss of $3.1
million before giving effect to a gain of $29.4 million, net of taxes, from the
sale of the Automotive Group and a gain of $0.6 million from the early
extinguishment of debt, which when included, resulted in net income of $27.0
million for the six months ended June 30, 1999.
The net revenues and income from operations of the Company were (in millions):
<TABLE>
<CAPTION>
Income
Net Revenue From Operations
----------- ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
--------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Publishing Segment $32.6 $28.5 $4.2 $6.0
Entertainment Segment 7.9 9.0 3.7 5.9
------- ------- ------ ------
$40.5 $37.5 $7.9 $11.9
Corporate Administrative Expenses (7.0) (6.5)
------- ------- ------ ------
$40.5 $37.5 $0.9 $5.4
======= ======= ====== ======
</TABLE>
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were (in
millions):
<TABLE>
<CAPTION>
Income
Net Revenues From Operations
------------ ---------------
Six Six
Months Ended Months Ended
June 30, June 30,
--------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $26.7 $26.9 $2.9 $5.7
International edition licensing 1.0 1.0 0.8 0.8
Power Magazine 0.0 0.6 0.0 (0.5)
Automotive Magazines 4.9 0.0 0.5 0.0
----- ------ ----- -----
$32.6 $28.5 $4.2 $6.0
===== ====== ===== =====
</TABLE>
15
<PAGE> 16
ITEM 2. (CONTINUED)
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $26.9
million and $26.7 million for the six months ended June 30, 2000 and 1999,
respectively, an increase of $0.2 million. Newsstand revenue was $18.4 million
and $18.1 million for the six months ended June 30, 2000 and 1999, respectively,
an increase of $0.3 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 $4.4 million and $4.6 million for the six months ended June 30, 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 $3.4 million and $3.6 million for the six months ended
June 30, 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 six months ended June 30, 2000.
Publishing-production, distribution and editorial expenses were $14.3 million
and $14.4 million for the six months ended June 30, 2000 and 1999, respectively,
a decrease of $0.1 million. Paper costs were $5.7 million for the six months
ended June 30, 2000, compared to $5.1 million for the six months ended June 30,
1999, an increase of $0.6 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
$4.9 million for the six months ended June 30, 2000, compared to $5.4 million
for the six months ended June 30, 1999, a decrease of $0.5 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 $2.2
million and $2.3 million for the six months ended June 30, 2000 and 1999
respectively, a decrease of 0.1 million. Editorial costs were $1.5 million and
$1.6 million for the six months ended June 30, 2000 and 1999, respectively, a
decrease of $0.1 million.
Selling, general and administrative expenses were $6.9 million for the six
months ended June 30, 2000, compared to $9.4 million for the six months ended
June 30, 1999, a decrease of $2.5 million. The decrease is primarily due to
decreased salaries of $1.1 million, decreased subscription costs of $0.8 million
as a result of fewer direct subscription mailings, decreased commission expense
of $ 0.2 million, decreased fulfillment expense of $0.1 million, decreased
retail distribution allowance expenses of $0.1 million and decreased advertising
expense of $0.1 million during the six months ended June 30, 2000.
INTERNATIONAL EDITION LICENSING
Revenues from licensing of international editions, which are included in other
revenue, were $1.0 million for the six months ended June 30, 2000 and 1999,
respectively.
16
<PAGE> 17
ITEM 2. (CONTINUED)
POWER MAGAZINE
There were three issues (April, May & June 2000) of Power Magazine during the
six months ended June 30, 2000. Revenues from these issues were $0.6 million.
Newsstand and subscription revenues were $0.3 million and advertising revenue
was $0.3 million.
Publishing-production, distribution and editorial expenses were $0.7 million for
the six months ended June 30, 2000.
Selling, general and administrative expenses were $0.4 million for the six
months ended June 30, 2000.
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $9.0 million for the six months
ended June 30, 2000, compared to $7.9 million for the six months ended June 30,
1999, an increase of $1.1 million. The Company's video business revenues were
$1.6 million for the six months ended June 30, 2000, compared to $1.2 million
for the six months ended June 30, 1999, an increase of $0.4 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 $0.7 million and $0.8 million for the six
months ended June 30, 2000 and 1999, respectively, a decrease of $0.1 million.
Revenues for the first half 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 $6.8 million and $6.0 million for the six months ended
June 30, 2000 and 1999, respectively, an increase of $0.8 million. The increase
is primarily attributable to lower chargebacks and revenue from the sale of
advertising banners on its internet site. The Company has lowered 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. Advertising revenues
from banners on the internet site were $0.2 million for the six months ended
June 30, 2000.
Direct costs were $0.6 million for the six months ended June 30, 2000, compared
to $0.9 million for the six months ended June 30, 1999, a decrease of $0.3
million. The decrease is primarily attributable to $0.4 million of lower costs
due to the change to a new national wholesale DVD distributor.
Selling, general and administrative expenses were $2.5 million and $3.3 million
for the six months ended June 30, 2000 and 1999, respectively, a decrease of
$0.8 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 $6.5 million for the six months ended
June 30, 2000, compared to $7.0 million for the six months ended June 30, 1999,
a decrease of $0.5 million. This decrease is primarily attributable to
decreased expenses of $0.1 million as a result of the sale of the Automotive
Magazines, decreased salary expenses ($0.3 million) and decreased consulting
fees ($0.2 million), offset by an increase in attorney 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 $0.3 million and $0.2
million for the six months ended June 30, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $4.9 million in cash and cash equivalents,
compared to $5.7 million at December 31, 1999. The decrease in cash and cash
equivalents during the six months ended June 30, 2000, resulted from cash flows
provided by operating activities of $1.4 million, partially offset by cash flows
used in investing activities of $0.2 million and cash flows used in financing
activities of $2.0 million.
17
<PAGE> 18
ITEM 2. (CONTINUED)
Cash flows from operating activities
Net cash provided by operating activities was $1.4 million for the six months
ended June 30, 2000, compared to net cash used by operating activities of
$8.7 million for the three months ended June 30, 1999, an improvement of
$10.1 million. Net cash provided by operating activities for the six months
ended June 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 the December 1999 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 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 six months ended June 30, 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 $0.2 million for the six months ended
June 30, 2000, compared to net cash provided by investing activities of $34.9
million for the three months ended June 30, 1999. Cash used in investing
activities for the three months ended June 30, 2000 was the result of capital
expenditures of $0.2 million. Cash provided by investing activities for the
three months ended June 30, 1999 was 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 $2.0 million for the three
months ended June 30, 2000, compared to cash flows used in financing
activities of $27.2 million for the three months ended June 30, 1999.
Affiliated company advances at June 30, 2000 decreased $0.6 million from the
December 31, 1999 balance, whereby the Company is owed $2.4 million by GMI as
of June 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 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 June 30, 2000, the Company has a loan outstanding to
the principal shareholder of GMI of $1.0 million. The loan is evidenced by a
promissory note, bears interest at 11% 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.
18
<PAGE> 19
ITEM 2. (CONTINUED)
Future outlook
The Company's cash balance was $4.9 million at June 30, 2000 compared to $5.7
million at December 31, 1999. During the six months ended June 30, 2000, the
Company provided $1.4 million in cash flow from its operations. On December 31,
2000 the $52,000,000 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 secure a source of funding for the refinancing of the Notes,
there can be no assurance that the Company will be able to secure such funding
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 six month period to achieve profitability and improve cash flow.
These actions have improved the profitability of the Company during the current
six month period, resulting in income from operations of $5.4 million, net
income of $1.4 million and positive cash flows from operations of $1.4 million
for the first six months ended June 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 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 June 30, 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.
19
<PAGE> 20
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 financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed in the "Exhibit Index" are filed as part
of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 2000.
20
<PAGE> 21
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: July 28, 2000 By: /s/ John D. Orlando
-----------------------------------------
Signature
John D. Orlando
Senior Vice President-Chief Financial
Officer
(Duly Authorized Officer and
Principal Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Item
----------- ----
<S> <C>
27 Financial Data Schedule
----------------------------------------------------------------
</TABLE>
22
