GENERAL MEDIA INC, 10-K, 2000-03-30

GENERAL MEDIA INC
10-K, 2000-03-30
PERIODICALS: PUBLISHING OR PUBLISHING & PRINTING

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 33-76716

GENERAL MEDIA, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-3750988
(State of incorporation) (IRS Employer Identification No.)

11 PENN PLAZA, NEW YORK, NY 10001.
(Address of principal executive offices)

(212) 702-6000
(Registrant's telephone number)

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SECURITIES REGISTERED PURSUANT TO SECTIONS 12(B) OR 12(G) OF THE ACT: NONE

----------------------

Indicate by check mark whether 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 each 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [N/A]

The aggregate market value of the Registrant's common stock, par value $.01 per
share, held by non-affiliates of the Registrant was $0.

As of March 17, 2000 , there were 475,000 shares outstanding of the Registrant's
common stock, par value $.01 per share.

----------------------

DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
LOCATION IN FORM 10-K IN WHICH
DOCUMENT DOCUMENT IS INCORPORATED
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None
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GENERAL MEDIA, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I

<S> <C>
Item 1. BUSINESS.................................................... 3
Item 2. PROPERTIES.................................................. 10
Item 3. LEGAL PROCEEDINGS........................................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS..................................................... 12

PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS........................... 12
Item 6. SELECTED FINANCIAL DATA..................................... 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 15

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .................................... 26

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 26

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 27
Item 11. EXECUTIVE COMPENSATION...................................... 28
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................. 31
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................ 31

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K......................................... 32
</TABLE>

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PART I

ITEM 1. BUSINESS.

IN GENERAL

General Media, Inc. ("General Media"), together with its
subsidiaries (General Media and its subsidiaries are collectively referred to as
the "Company"), is a publishing and entertainment company engaged in the
production and sale of men's magazines, various entertainment products and until
March 1999, automotive magazines and an automotive television series. In
December 1999, the Company launched a new magazine entitled Mind & Muscle Power
("Power") which targets the men's health magazine market. The initial issue was
launched as a free supplement packaged with the January 2000 issue of Penthouse
magazine that went on sale in December 1999. Normal distribution of Power will
begin with the April 2000 issue, which will go on sale at the newsstand in March
2000.

On March 2, 1999 (the "Closing Date"), the Company sold
substantially all of the assets, exclusive of net newsstand and advertising
accounts receivable, of its wholly-owned subsidiary, General Media Automotive
Group, Inc.("GMAG") to EMAP Petersen, Inc.("EMAP") for $35 million in cash plus
the assumption of certain liabilities and deferred subscription liabilities, as
defined in the Asset Sale and Purchase Agreement between EMAP and GMAG dated as
of February 9, 1999 (the "Asset Purchase Agreement"). The sale price is subject
to an adjustment which was to be finalized within 60 days from the Closing Date
and shall be increased or decreased on a dollar for dollar basis by the amount
that net working capital, as defined in the Asset Purchase Agreement, deviates
from $1.5 million. The Company recorded an after tax gain of approximately $27
million on the sale although a final determination with respect to the sale
price adjustment has not yet been made. The Company does not expect such
adjustment to be material.

General Media is a wholly owned subsidiary of General Media
International, Inc. ("GMI"). GMI, together with its subsidiaries other than the
Company (such subsidiaries are collectively referred to as the "Other GMI
Subsidiaries"), engages in operations that are organized into the Real Estate
Group (which owns various properties and real estate holdings), and the Fine
Arts Group (which buys, sells and holds for sale a substantial inventory of
works of art). GMI formed General Media, a Delaware corporation, in November
1993 to implement a new operating and financing plan, which included (i) the
transfer to General Media of the stock of certain subsidiaries that formed a
portion of the publishing and the entertainment segments of GMI and (ii) the
private offering of senior debt securities and common stock purchase warrants
(the "Private Offering"). See "Market for the Registrant's Common Stock and
Related Stockholder Matters." Such plan enabled GMI to, among other things,
direct resources to certain subsidiaries within its publishing and entertainment
segments and improve operational and financial flexibility by replacing
short-term debt with fixed-rate, long-term debt.

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The net revenues, income from continuing operations and identifiable
assets attributable to each of the Company's industry segments are presented in
Note 11 to Consolidated Financial Statements included in Part IV, Item 14.

PRODUCTS AND SERVICES - PUBLISHING SEGMENT

PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS

Penthouse magazine was founded by Robert Guccione, who first
published the magazine in London in 1965 and in the United States in 1969.
Penthouse magazine, the magazine of sex, politics and protest, offers its
readers a combination of photography, investigative journalism, fiction,
illustration, humor, politics, art and business. This creative mix of
informative and entertaining articles combined with high quality photography has
enabled Penthouse magazine to maintain a loyal consumer base.

Penthouse magazine prides itself on the quality of the editorial
package it presents to its readers every month. Its investigative reporting over
the years has been credited with significant "news breaks" that have resulted in
press conferences and national headlines. The monthly Penthouse magazine
interview of public personalities is also a hallmark of the magazine. Over the
years, Penthouse magazine has interviewed major international figures, domestic
politicians, sports heroes and entertainment personalities.

In addition, leading figures of American political and social life
have written provocative articles for Penthouse magazine. Some of the country's
best selling writers contribute their fiction and non-fiction stories to
Penthouse magazine. The magazine also includes monthly fashion features, as well
as reviews of films, books, computer products, wine and spirits and regular
coverage of health and fitness issues for men.

To capitalize on the success of Penthouse magazine, the Company
established six Affiliate Publications. Each of the Affiliate Publications is
further described below.

Forum: A monthly publication in digest form that includes adult
information, advice and entertainment provided by authors, journalists and
medical and legal experts. The magazine is published domestically and licensed
in Europe and Australia. In addition, the Company publishes several special
digest issues of Forum each year. Forum is sold at newsstands and through
subscriptions.

Variations: A monthly publication in digest form that features
articles detailing the latest trends in adult entertainment. In addition, the
Company publishes several special digest issues of Variations each year.
Variations is sold at newsstands and through subscriptions.

The Girls of Penthouse: A bi-monthly full-sized publication
featuring photographs of the most popular models who have appeared in Penthouse
magazine. The Girls of Penthouse is sold only through newsstands.

Penthouse Letters: A monthly full-sized publication featuring
letters written by readers describing their erotic experiences and fantasies.
Penthouse Letters is sold at newsstands and through subscriptions.

Hot Talk: A bi-monthly full-sized publication that featured adult
entertainment articles and letters describing erotic telephone conversations. In
December 1999, the Company discontinued publication of Hot Talk.

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Penthouse Comix: A bi-monthly, adult-theme comic book featuring the
creative work of well-known comic artists. The first issue was published in
April 1994. Penthouse Comix was available at newsstands and through
subscriptions. In April 1995, a second adult-theme comic book, Men's Adventure
Comix, began bi-monthly publication, in alternating months with Penthouse Comix.
Men's Adventure Comix discontinued bi-monthly publication in March 1996 and
Penthouse Comix was then published 10 times annually and Men's Adventure Comix
was published 2 times annually. In June of 1998 the Company published the final
issue of Penthouse Comix and Men's Adventure Comix.

Circulation.

In 1999, Penthouse magazine had a domestic average monthly
circulation of approximately 957,000 copies and the Affiliate Publications had a
combined domestic average monthly circulation of approximately 440,000 copies.
The table below presents domestic average monthly circulation figures for
Penthouse magazine and the Affiliate Publications for the years ended December
31, 1995 through 1999.

PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
DOMESTIC AVERAGE MONTHLY CIRCULATION
(COPIES IN THOUSANDS)

<TABLE>
<CAPTION>
Penthouse Magazine Affiliate Publications Total
Year Ended -------------------------------------------------- ---------------------------------------------- Domestic
December 31, Newsstand Subscription Total Newsstand Subscription Total Circulation
-------------- ------------------- ---------- -------------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995. . . . 720 401 1,121 779 64 843 1,964
1996. . . . 645 356 1,001 634 58 692 1,693
1997. . . . 533 379 912 554 50 604 1,516
1998. . . . 578 438 1,016 475 50 525 1,541
1999. . . . 552 405 957 391 49 440 1,397
</TABLE>

Penthouse magazine and the Affiliate Publications are primarily
sold through newsstand distribution by convenience stores, bookstores and
newsstands. Approximately 49% of Penthouse's newsstand sales are derived from
convenience stores, 12% are from bookstores and 12% are from newsstand
distribution channels. Newsstand copies sold as a percentage of total copies
sold of Penthouse magazine and the Affiliate Publications were approximately 68%
for the year ended December 31, 1999.

The number of magazine copies sold on newsstands varies monthly,
depending on, among other things, the cover, pictorials and editorial content.
Approximately 16% of total newsstand copies are sold internationally.

Newsstand revenues for Penthouse magazine and the Affiliate
Publications were $38.1 million, $41.2 million and $42.0 million for the years
ended December 31, 1999, 1998 and 1997, respectively, representing approximately
48%, 39% and 40% of the Company's net revenues for these periods, respectively.

In recent years, domestic newsstand circulation for men's magazines
has been declining. From 1995 to 1999, Penthouse magazine's and the Affiliate
Publications' domestic average monthly newsstand circulation decreased by 37%.
The Company believes that the loss of several newsstand distribution outlets due
to the change in social climate toward men's magazines, together with certain
advances in electronic technology, including the proliferation of retail video
outlets and the increased market share of cable television and the internet,
have largely contributed to the overall decrease in circulation.

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This decrease in domestic average monthly circulation for Penthouse
magazine and the Affiliate Publications has been partially offset, however, by
the Company's ability to maintain consistent cover price increases and the
recapture of certain convenience store distribution channels. Penthouse
magazine's cover price, for example, has steadily increased from $3.00 per issue
in 1983 to $5.99 per issue for six issues, $6.99 per issue for three issues and
$7.99 for three issues in 1999. The Company regularly price tests its magazines
and adjusts cover prices accordingly.

While newsstand circulation is the Company's principal means of
distribution for Penthouse magazine and the Affiliate Publications, the Company
has sought to increase their subscription circulation. The price of a twelve
month subscription to Penthouse magazine ranged from $23.00 to $46.00 in 1999,
depending upon the source of the subscription. The Company attracts new
subscribers to its magazines primarily through its own direct mail advertising
campaign, and through subscription agent campaigns. The Company recognizes
revenues from its magazine subscriptions over the term of the subscriptions.

Subscription revenues for Penthouse magazine and the Affiliate
Publications were $7.0 million, $7.7 million and $7.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively, representing approximately
9%, 7% and 7% of the Company's net revenues for these periods, respectively.

Advertising.

Penthouse magazine and the Affiliate Publications are relatively
less dependent on advertising revenues than many other magazines as
approximately 69% of their respective revenues were generated from newsstand
sales, approximately 13% were generated from subscription sales and
approximately 17% were generated from advertising during the year ended December
31, 1999. Advertising revenues (excluding affiliated advertising revenues) for
Penthouse magazine and the Affiliate Publications were $9.6 million, $12.3
million and $12.9 million for the years ended December 31, 1999, 1998 and 1997,
representing approximately 12% of the Company's total net revenues for all three
of these periods.

In 1999, Penthouse magazine's advertising pages (excluding
affiliated advertising pages) decreased by 8% from the prior year, while
advertising revenues (excluding affiliated advertising revenue) decreased by 24%
from 1998. This decrease was primarily due to less pay-per-call advertising in
1999. In 1998, Penthouse magazine's advertising pages decreased by 5% while
advertising revenues (excluding affiliated advertising revenue) decreased 2%
from 1997.

Penthouse magazine also includes advertising for the Company's
products, primarily its own pay-per-call telephone lines, video cassettes,
internet products and pay-per-view programming.

The Food and Drug Administration (the "FDA") issued regulations in
August 1996 which prohibits the publication of tobacco advertisements containing
drawings, color or pictures. In March 2000, the U.S. Supreme Court upheld a
ruling by the Fourth Circuit Court of Appeals that struck down the regulations
on the grounds that the FDA lacked the authority to regulate tobacco products.

FOREIGN EDITION LICENSING

The Company has sought to expand its readership through foreign
edition licensing arrangements pursuant to which the Company licenses the
Penthouse brand name to publishers in foreign countries. Licensees typically use
pictorials from the Company's library and provide their own editorial content to
create the foreign

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editions. The Company, however, oversees the finished product to insure quality
control and to maintain the spirit of the domestic edition. Under current
licensing arrangements, the Company generally receives a one-time up-front fee
and a royalty based upon a percentage of both circulation and advertising
revenues, subject to certain minimum payments. In 1999, the Company received
revenues from licensing agreements with publishers in Australia, Bulgaria, Czech
Republic, France, Germany, Greece, Holland, Hong Kong, Italy, Japan, Korea,
Spain, Taiwan, Thailand and the United Kingdom.

Revenues from licensing of foreign editions were $2.0 million, $2.1
million and $2.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively, representing approximately 3%, 2% and 2% of the Company's net
revenues for these periods, respectively.

AUTOMOTIVE MAGAZINES

The Company published four domestic automotive titles (the
"Automotive Magazines") until March 1999, that had a combined average monthly
circulation of approximately 749,000 copies. These title were Four Wheeler,
Stock Car Racing, Open Wheel and Drag Racing Monthly.

Revenues for the Automotive Magazines were $4.9 million, $23.1
million and $20.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively, representing 6%, 22% and 20% of the Company's net revenues for
these periods.

MENS HEALTH & FITNESS MAGAZINE

In December 1999, the Company launched a new magazine entitled Mind
& Muscle Power that was packaged as a free supplement to the January 2000 issue
of Penthouse magazine that went on sale in December 1999. Monthly publication
and sale of Power will begin with the April 2000 issue, which will go on sale at
newsstands in March 2000.

Power magazine will feature informative, entertaining and
provocative articles on diet, nutrition, training and men's health.

PRODUCTION, PRINTING, NEWSSTAND DISTRIBUTION AND SUBSCRIPTION FULFILLMENT

The Company employs a staff of professionals that oversees the
production, printing, distribution and fulfillment of its magazines. Through the
use of state-of-the-art production equipment, economies of scale in printing
contracts and efficiencies in subscription solicitation and fulfillment, the
Company is able to effectively produce and distribute all of its publications.
The Company's production system for both graphics and editing is
state-of-the-art. Approximately sixteen employees produce the Company's
magazines with minimal overtime.

In 1999, the Company's magazines, with the exception of Forum and
Variations, were printed by R. R. Donnelley Corporation ("Donnelley") pursuant
to several agreements which, after giving effect to an extension and amendment
dated July 1997, expire in December 2003. In 1999, Forum and Variations were
printed by Access Printing. Should the Company wish to change printers,
management believes that other printers of similar quality could be engaged.

The newsstand distribution of the Company's magazines is handled by
the Curtis Circulation Company ("Curtis Circulation") pursuant to an agreement
that expires in November 2005 or upon prior notice by either the

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Company or Curtis Circulation. Curtis Circulation distributes the Company's
publications through a network of approximately 225 marketing representatives to
independent wholesalers, as well as to other channels of distribution. Curtis
Circulation also provides the Company with other services, including management
information and promotional and specialty marketing services. The Company
receives a cash advance from Curtis Circulation at the time each issue is
released for sale. The Company recognizes revenue from newsstand sales based on
its estimate of copy sales at such time as the issue is released for sale and
adjusts the estimate periodically based upon actual sales information. Each
issue is settled with Curtis Circulation based upon the number of magazines
actually sold, compared to the estimated number of copies sold that Curtis
Circulation used to determine its cash advance.

Effective July 1, 1999, Curtis Circulation exercised its option to
assume the international newsstand distribution of the Company's magazines.
Accordingly, the Company terminated its international distribution agreement
with Worldwide Media Services, Inc. in accordance with the terms of that
agreement. The management believes that the consolidation of its distribution
under Curtis Circulation will be beneficial to the Company.

The Company's subscriptions are currently serviced by Palm Coast
Data Service, Inc. ("PCD"). PCD performs the following services: receiving,
verifying, balancing and depositing payments from subscribers; maintaining
master files on all subscribers by magazine; issuing bills and renewal notices
to subscribers; issuing labels; packaging and mailing magazines as directed by
the Company; and furnishing various reports to monitor all aspects of the
subscription operations.

Subscription copies of the magazines are delivered through the U.S.
Postal Service as second class mail. The Company experienced a general postal
rate increase of 6% in January 1999. The next postal rate increase has not yet
been scheduled.

PRODUCTS AND SERVICES - ENTERTAINMENT SEGMENT

The Company's entertainment segment produces and distributes
adult-oriented entertainment products, including internet pay services,
pay-per-call telephone lines, video cassettes and pay-per-view programming, and
also includes the licensing of video cassettes under the Penthouse brand name.
Revenues of the entertainment segment were $16.6 million, $17.6 million and
$16.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively, representing 21%, 17% and 15% of the Company's net revenues for
these periods, respectively.

The Company provides adult-oriented entertainment through
pay-per-call telephone lines which feature both recorded audio programs and live
operators on 900 and 800 number telephone lines. The Company's recorded audio
programs are created and broadcast by independent service bureaus. The operators
on the live telephone lines are employed by the service bureaus and are not
employees of the Company.

The Company's 900 number telephone lines are romantic in nature and
feature programs where users can listen to computerized conversations, speak
with live operators and participate in live one-on-one talk, dating and chat
lines. The 900 number telephone calls are billed directly to the caller's
telephone number and typically cost between $3.95 and $4.95 per minute. The
Company's 800 number telephone lines are explicit and uncensored in nature and
include certain live Penthouse party lines and live one-on-one talk, dating and
chat lines and typically cost $4.95 per minute. The 800 number telephone calls
are billed to credit cards in accordance with the Federal Communications
Commission safe harbor provisions, which require that such telephone calls be
billed

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to credit cards to insure that calls are not made by minors. The Company has
pay-per-call telephone lines in the United States, Canada, Puerto Rico and
Montserrat.

The Company develops, produces and distributes products for the
domestic and international home video and pay-per-view markets. Since 1990, the
Company has produced 72 videos, which have been released for domestic
distribution through Warner Home Video, a subsidiary of Time Warner, Inc. The
videos are also offered for sale through the Company's magazines and through the
Penthouse internet site. These videos are generally approximately 60 minutes in
length, have a level of explicitness greater than "R" and feature Penthouse
centerfold models. Many of the Company's videos are also sold internationally
through licensing arrangements. In April 1997, the Company entered into an
agreement with Request Television, whereby the Company's videos are first shown
on Request's pay-per-view network prior to retail distribution. Revenues
received from the agreement is based upon the number of pay-per-view purchases.
In June of 1998, Request Television ceased all business operations. In 1999, the
Company entered into agreements with BET Action PPV, HBO, Viewer's Choice and
various smaller independent pay-per-view channels. Revenues received from these
agreements is based on the number of pay-per-view purchases and fixed amounts
per program and was $0.4 million in 1999. In June 1999, the Company entered into
two agreements with Image Entertainment, whereby the Company would license its
catalog titles and its full length feature film, Caligula, on DVD for up-front
license fees of $0.9 million and $0.1 million, respectively and a royalty fee
based on the number of units sold thereafter. The Company is amortizing the
up-front licensing fees over the terms of the respective contracts.

Between 1994 and 1996, the Company released eight CD-ROM interactive
products. These products were unprofitable and the Company discontinued this
product line in 1997.

In August 1995, the Company began Penthousemag.com as a paid member
only service on the Internet. Customers joining the site can select from several
different membership plans ranging from monthly to lifetime. Revenues received
from the sale of memberships are recognized over the term of the membership.
Paid members receive access to adult-oriented photographs, video feeds and chat
rooms via a personal identification number that expires according to the
membership period selected. Memberships are billed to the customers' credit card
in accordance with the Federal Communications Commission's safe harbor
provision. The Company also has agreements with certain third party Internet
sites that also provide adult-oriented entertainment. Under these agreements,
the Company provides a banner on its Internet site as well as hosting and
billing services for these third party providers who are responsible for the
content and maintenance of their site. In return, the Company receives a portion
of the paid membership fees to these sites in accordance with the agreements.
Net revenues from the Internet business for the years ended December 31, 1999,
1998 and 1997 were $12.8 million, $11.8 million and $4.7 million, respectively.

SOURCES AND AVAILABILITY OF RAW MATERIALS

Paper is the primary raw material used in the production of the
Company's magazines. The Company uses a variety of high quality coated and
uncoated paper that is purchased from a number of suppliers. The Company
believes that there are several alternative suppliers in the event it cannot
purchase from its present suppliers.

TRADEMARKS

The Company's trademarks are essential to the Company's current
business operations and future expansion. The trademarks, which are renewable
indefinitely, include Penthouse, Forum, Variations, Penthouse Letters, Girls of
Penthouse, Mind & Muscle Power, Hot Talk, Penthouse Comix and Penthouse Max.
Until

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March 1999, the Company's trademarks included Four Wheeler, Open Wheel, Stock
Car Racing and Drag Racing Monthly.

SEASONALITY

The Company's business is generally not seasonal in nature. Issues
of Penthouse magazine with female celebrity covers or pictorials, however, have
historically resulted in higher newsstand sales than non-celebrity issues. Sales
of the Company's video cassette products may vary based upon the timing of the
release of new videos.

DEPENDENCE ON CUSTOMERS

No customer of the Company accounted for more than five percent of
the Company's net revenues in 1999, 1998 or 1997, and no part of the business is
dependent upon a single customer or a few customers, the loss of any one or more
of which would have a material adverse effect on the Company. However, one
advertising agency placed $2.2 million, $2.4 million and $6.0 million in
advertising revenues in Penthouse magazine and the Affiliate Publications in
1999, 1998 and 1997, respectively. These revenues represent 3%, 2% and 6% of the
Company's net revenues in 1999, 1998 and 1997, respectively.

COMPETITORS

Magazine publishers face intense competition for both circulation
and advertising revenues. The main competitors of Penthouse magazine and the
Affiliate Publications are magazines that primarily target a male audience.
Other types of media that carry advertising also compete for advertising with
the Company's magazines.

Competition in the internet business comes from many different
sources. The Company's advantage in this area is the Penthouse Trademark and the
low cost of advertisement for its internet service in its own magazines. Few
other magazine publishers have either more adult-oriented magazines or a
comparable combined circulation for such magazines.

Competition in the pay-per-call business is generally limited to a
few major competitors. The Company's advantage in this area is also the low cost
of advertisement for such pay-per-call service in its own magazines.

EMPLOYEES

As of March 17, 2000, the Company employed 157 full-time employees,
none of whom are members of a union, and 6 part-time employees.

ITEM 2. PROPERTIES.

The Company's principal corporate offices for both the publishing
and entertainment segments are located in New York City at 11 Penn Plaza. The
Company leases office space for its principal corporate offices, the publishing
and sales offices of its publishing segment and the production and sales offices
of its entertainment segment at various locations, as set forth below.

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<TABLE>
<CAPTION>
Approx. Lease
Sq. Ft. Expiration
Location Principal Use Occupied Date
- -------- ------------- -------- ----
<S> <C> <C> <C>
11 Penn Plaza, Principal Corporate Offices,
New York, New York Publishing and Sales Office 49,000 March 11, 2009

Chicago, Illinois Sales Office 800 March 31, 2002

Santa Monica, California Production and Sales Office 6,000 April 30, 2000
</TABLE>

The Company has a ten-year seven month lease for its principal
corporate offices which commenced on August 11, 1998 and requires annual lease
payments of $1.7 million until December 31, 2001 and thereafter of $1.9 million
until the expiration of lease. The Company believes that its principal corporate
offices are suitable and adequate for its current business operations and that,
upon expiration of the lease, it will be able to obtain similarly suitable and
adequate office space in Manhattan at a competitive price.

The Company plans not to renew its existing lease for its California
office and to relocate to smaller premises within the same state, since most of
the space of such facility was used by the staff of the Automotive Magazines.

The Company also uses a 17,000 square foot townhouse located in New
York City (the "Townhouse"), owned by GMI and Robert C. Guccione, for Company
related activities, including business meetings and promotional and marketing
events. Pursuant to a Properties and Salary Allocation Agreement among the
Company, GMI and a GMI subsidiary (the "Properties and Salary Allocation
Agreement"), the Company reimbursed GMI approximately $0.5 million in 1999, 1998
and 1997 for the use of such property. See "Certain Relationships and Related
Transactions."

ITEM 3. LEGAL PROCEEDINGS.

The Internal Revenue Service has completed an audit of GMI's Federal
income tax returns for 1986 through 1990. Subsequent years' income tax and other
tax returns filed by GMI are being audited or are subject to audit by
governmental authorities. Under the terms of a Tax Sharing and Indemnification
Agreement among the Company, GMI and the Other GMI Subsidiaries (the "Tax
Sharing Agreement"), GMI and the Other GMI Subsidiaries will be liable for any
payments due as a result of these audits through fiscal 1993.

In August 1996, an action was brought against the Company alleging
various wrongs in connection with the Company's dealings with the former editor
of Penthouse Comix and Men's Adventure Comix. By decision dated December 2,
1998, the United States District Court dismissed the plaintiff's federal claims
with prejudice and the plaintiffs' state claims without prejudice. The
plaintiffs have indicated their intention to file a similar claim in New York
State Courts however no such claim has yet been filed. In the opinion of
management, the outcome of this litigation is not reasonably likely to have a
material adverse effect on the Company's financial position or results of
operations.

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

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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. The Company intends to vigorously defend the
arbitration, which is scheduled for June 2000. 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.

The Company's subsidiaries are parties to various other pending
legal proceedings arising in the ordinary course of business. While the outcome
of these proceedings cannot be predicted with certainty, the Company believes
that these proceedings are not reasonably likely to have a material adverse
effect on the Company's financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.

As of March 17, 2000, GMI was the sole holder of the 475,000 shares
of common stock, $.01 par value per share (the "Common Stock"), of the Company
currently issued and outstanding. There is no established public trading market
for the Common Stock.

Holders of shares of Common Stock are entitled to receive dividends
out of funds legally available for payment thereof in such amounts per share as
may be declared by the Company's Board of Directors, subject to the restrictions
contained in an Indenture (the "Indenture"), dated December 21, 1993, which was
entered into by the Company and IBJ Whitehall Bank & Trust Company, as trustee,
in connection with the issuance of Series A 10 5/8% Senior Secured Notes Due
2000 (the "Series A Notes") in the aggregate principal amount of $85 million in
the Private Offering. Pursuant to the Indenture, the Company may not declare a
dividend on the Common Stock, subject to certain exceptions, unless it meets
certain financial covenants set forth therein. The Company's subsidiaries,
however, are permitted to make inter-company dividends on their shares of common
stock.

The Company declared and paid a dividend of $0.4 million in
accordance with the terms and conditions of the Indenture in 1998. The Company
did not declare any dividend for the fiscal years ended December 31, 1999 and
1997.

Pursuant to a Registration Rights Agreement, dated December 21,
1993, among the Company, Jefferies & Company, Inc. and Furman Selz Incorporated
(the "Underwriters"), the Company consummated an exchange offer in July 1994 to
exchange the Series A Notes for Series B 10 5/8% Senior Secured Notes Due 2000
(the "Series B Notes"), which were registered under the Securities Act of 1933.
The Series B Notes are substantially identical to the Series A Notes (including
principal amount, interest rate and maturity), except that the Series B Notes
are freely transferable.

12
<PAGE> 13
There is no established public trading market for the Series B
Notes. Jeffries & Company, Inc. is currently making a market in the Series B
Notes, although they are not obligated to do so. Any such market-making may be
discontinued at any time at the sole discretion of Jeffries & Company, Inc.
without notice. The Company does not intend to list the Series B Notes on any
securities exchange.

The Company also issued in the Private Offering 187,506 common stock
purchase warrants (the "Warrants") to purchase an aggregate of 25,000 shares of
Common Stock (approximately 5% of the outstanding Common Stock) (the "Warrant
Shares"). The Warrants are exercisable for Warrant Shares at an exercise price
of $.01 per Warrant Share until December 22, 2000. Under the Warrant Agreement,
dated as of December 21, 1993, between the Company and IBJ Whitehall Bank &
Trust Company, as warrant agent, the Company is obligated to use its best
efforts to register the Warrants and Warrant Shares if it proposes to register
any shares of Common Stock under the Securities Act of 1933, upon the request of
the holders of such Warrants and Warrant Shares. At any time after December 21,
1998, the holders of the Warrants and Warrant Shares may request that the
Company purchase for cash all of their Warrants or Warrant Shares.

13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----

($ in Millions)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenue $120.4 $114.6 $103.8 $105.1 $ 78.8
Operating income (loss) (0.3) 8.9 7.4 5.5 (0.8)
Interest expense, net 9.8 9.6 9.3 9.4 7.2

Gain on sale of Automotive
Magazines -- -- -- -- 30.7
Income (loss) from continuing
operations (10.0) (1.0) (1.9) (3.9) 19.2
OTHER DATA:
Depreciation and amortization $ 1.6 1.9 $ 1.9 $ 1.8 $ 0.9
Capital expenditures 4.7 0.4 0.3 2.8 0.6
Ratio of earnings to fixed
charges 0.0 0.9 0.8 0.6 3.5
BALANCE SHEET DATA:
Total assets $ 51.5 $ 45.6 $ 42.6 $ 41.9 $ 30.3

Current maturities of Series B
Notes -- -- -- -- 51.8
Total long-term debt 79.1 79.3 79.5 79.6 --
Total stockholders' deficiency (70.9) (71.9) (73.8) (78.1) (56.7)
</TABLE>

Certain amounts have been retroactively restated to reflect an accounting change
from the LIFO to FIFO inventory valuation method in 1997.

14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

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 until December 1999, six
affiliate magazines (the "Affiliate Publications" and, together with Penthouse
magazine, the "Mens Magazines"), the licensing of the Penthouse brand name to
publishers in foreign countries and until March 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 Power magazine
which targets the men's health magazine market. The initial issue was launched
as a free supplement packaged with the January 2000 issue of Penthouse magazine
which went on sale in December 1999. The entertainment segment of the Company
produces a number of adult-oriented entertainment products, including
pay-per-call telephone lines, video cassettes, pay-per-view programming and pay
subscription service on the internet.

The Company's revenues were $78.8 million for the year ended
December 31, 1999, compared to revenues of $105.1 million for the year ended
December 31, 1998, a decrease of $26.3 million. Of this decrease, $18.2 million
is attributable to the sale of the Automotive Magazines. Newsstand revenues were
$39.2 million and $46.2 million for the year ended December 31, 1999 and 1998,
respectively, a decrease of $7.0 million. The Automotive Magazines accounted for
$3.9 million of this decrease. Newsstand revenues for Mens Magazines were $38.1
and $41.3 million for the year ended December 31, 1999 and 1998, respectively, a
decrease of $3.2 million. Advertising revenues were $12.6 million and $26.1
million for the year ended December 31, 1999 and 1998, respectively, a decrease
of $13.5 million. Of this amount, $10.8 million is attributable to a loss of
advertising revenue from the sale of the Automotive Magazines. Advertising
revenues from Mens Magazines decreased $2.7 million. Advertising revenues from
the initial issue of Power magazine was $0.1 million. Subscription revenues were
$7.8 million and $11.9 million for the year ended December 31, 1999 and 1998,
respectively, a decrease of $4.1 million. Of this decrease, $3.3 million is
attributable to the sale of the Automotive Magazines and $0.8 million is
attributable to a decline in subscription revenues from the Mens Magazines.
Revenues for the Entertainment Segment were $16.6 million and $17.6 million for
the year ended December 31, 1999 and 1998, respectively, a decrease of $1.0
million. Revenues from the Company's video business were $2.4 million and $3.3
million for the year ended December 31, 1999 and 1998, respectively, a decrease
of $0.9 million. Revenues from the Company's pay-per-call business were $1.5
million and $2.5 million for the year ended December 31, 1999 and 1998,
respectively, a decrease of $1.0 million. Revenues from the Company's internet
business were $12.8 million and $11.8 million for the year ended December 31,
1999 and 1998, respectively, an increase of $1.0 million.

Loss from operations was $0.8 million for the year ended December
31, 1999, compared to income from operations of $5.5 million for the year ended
December 31, 1998. Loss from operations was negatively impacted by decreased
revenues, primarily due to the sale of the Automotive Magazines on March 2,
1999, severance and benefits of $0.7 million related to a reorganization of the
Company's operations initiated in December 1999, costs of $0.8 million related
to the launching of Power magazine in December 1999 and the adverse impact of
consolidations of companies in the magazine distribution industry that resulted
in the elimination of some of the distribution channels previously used by the
Company to distribute its magazines. There was also increased competition in the
mens magazine market, which caused the circulation of Penthouse and the
Affiliate Publications to decrease. These were partially offset by a decrease in
production, distribution and editorial costs

15
<PAGE> 16
resulting from a decrease in the number of copies printed and fewer issues of
certain publications, as well as decreased selling, general and administrative
expenses due to the sale of the Automotive Magazines.

Net non-operating income was $23.4 million for the year ended
December 31, 1999, compared to net non-operating expense of $9.4 million for the
year ended December 31, 1998. Included in non-operating income for the year
ended December 31, 1999 is a before tax gain of $30.7 million from the sale of
the Automotive Magazines (See Note 3 of the Notes To Consolidated Financial
Statements). Included in interest expense is the amortization of debt issuance
costs and discounts of $1.0 million for the year ended December 31, 1999,
compared to $1.2 million for the year ended December 31, 1998.

Net income for the year ended December 31, 1999 was $19.9 million,
compared to a net loss of ($3.9) million for the year ended December 31, 1998,
as a result of the above discussed factors.

The net revenues and income (loss) from operations of the Company
were as follows:

<TABLE>
<CAPTION>
Income
Net Revenue from operations
----------- ---------------
Year Ended Year Ended
December 31, December 31
------------ -----------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Publishing Segment $ 87.5 $ 62.2 $ 13.8 $ 5.6
Entertainment Segment 17.6 16.6 9.7 8.4
------ ------ ------ ------
$105.1 $ 78.8 $ 23.5 $ 14.0
Corporate Administrative Expenses (18.0) (14.8)
------ ------ ------ ------
$105.1 $ 78.8 $ 5.5 $ (0.8)
====== ====== ====== ======
</TABLE>

PUBLISHING SEGMENT

The net revenues and income from operations of the Publishing
Segment were as follows :

<TABLE>
<CAPTION>
Income
Net Revenues from operations
------------ ---------------
Year Ended Year Ended
December 31, December 31,
------------ ------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $62.3 $55.3 $ 9.5 $ 3.6
Foreign edition licensing 2.1 2.0 1.7 1.6
Automotive Magazines 23.1 4.9 2.6 0.4
----- ----- ----- -----
$87.5 $62.2 $13.8 $ 5.6
===== ===== ===== =====
</TABLE>

PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS

Revenues for Penthouse magazine and the Affiliate Publications
were $55.3 million and $62.3 million for the year ended December 31, 1999 and
1998, respectively, a decrease of $7.0 million. Newsstand revenue was $38.1
million and $41.3 million for the year ended December 31, 1999 and 1998,
respectively, a decrease

16
<PAGE> 17
of $3.2 million. The decrease is primarily attributable to an 18% decrease in
copies sold of the Affiliate Publications. Fewer copies were sold primarily due
to the adverse impact of consolidations of companies in the magazine
distribution industry which resulted in the elimination of some of the
distribution channels previously used by the Company to distribute its
magazines, increased competition in the mens magazine market, the publication of
fewer issues of Girls of Penthouse and Hot Talk magazines, and the suspension of
publication of Penthouse Comix during the second half of 1998. Advertising
revenue was $9.5 million and $12.3 million for the years ended December 31, 1999
and 1998, respectively, a decrease of $2.8 million. The decrease in advertising
revenue is primarily attributable to an 8% decrease in the number of advertising
pages sold in Penthouse magazine and a 23% decrease in the number of advertising
pages sold in the Affiliate Publications during the year ended December 31,
1999, as compared to the 1998 period. These decreases were primarily due to a
decrease in the number of pay-per-call ads sold in Penthouse and the Affiliate
Publications during the year ended December 31, 1999, as well as decreased
revenues due to fewer issues of certain magazines, as noted above. The
advertising rate for sexually oriented products and services, such as
pay-per-call services, is higher than for other advertisers, therefore the
decrease in pay-per-call ad pages sold resulted in a decrease in the average
rate per page for advertising pages sold in Penthouse magazine. This decrease
was partially offset by an increase in the average rate per page for advertising
pages sold in the Affiliate Publications. The advertisements in the Affiliate
Publications are primarily for sexually oriented products and services and
consequently there was no adverse change in the average rate per page associated
with the mix of advertisers in these magazines. Subscription revenue was $7.0
million and $7.7 million for the year ended December 31, 1999 and 1998,
respectively, a decrease of $0.7 million due primarily to a 7% decrease in the
number of subscription copies sold of Penthouse, a 1% decrease in the net
revenue per copy sold of Penthouse magazine, partially offset by a 6% increase
in the net revenue per copy sold of the Affiliate Publications. The decreased
revenue per copy was due primarily to a change in mix between agency sales
(which generate a lower revenue per copy) and direct to customer sales.

Publishing-production, distribution and editorial expenses were
$31.2 million and $32.8 million for the year ended December 31, 1999 and 1998,
respectively, a decrease of $1.6 million. Paper costs were $11.7 million and
$12.4 million for the year ended December 31, 1999 and 1998, respectively, a
decrease of $0.7 million. Print costs were $11.3 million for the year ended
December 31, 1999, compared to $12.3 million for the year ended December 31,
1998, a decrease of $1.0 million. The decrease is due primarily to a decrease in
copies printed and fewer issues of certain publications printed, as discussed
above, partially offset by an increase the cost per pound of paper and an
increase in the average number of pages printed as a result of the publication
of a special 30th Anniversary (September 1999) issue of Penthouse magazine which
was larger than the normal Penthouse issue. Distribution costs were $4.9 million
for the years ended December 31, 1999 and 1998. Editorial costs were $3.4
million and $3.2 million for the year ended December 31, 1999 and 1998,
respectively, an increase of $0.2 million. This increase is primarily
attributable to the publication of the special 30th Anniversary issue.

Selling, general and administrative expenses were $19.7 million for
the year ended December 31, 1999, compared to $19.9 million for the year ended
December 31, 1998, a decrease of $0.2 million.

FOREIGN EDITION LICENSING

Revenues from licensing of foreign editions, which are included in
net revenues - other, were $2.0 million and $2.1 million for the years ended
December 31, 1999 and 1998, respectively, a decrease of $0.1 million. This
decrease is due primarily to the termination of certain contracts with foreign
licensees of Penthouse magazine.

Selling, general and administrative expenses were $0.4 million for
the year ended December 31, 1999 and 1998.

17
<PAGE> 18
POWER MAGAZINE

Revenues for Power magazine were $0.2 million for the year ended
December 31, 1999. This revenue consisted primarily of advertising revenue from
the initial issue which was included as a free supplement packaged with the
January 2000 (on sale December 1999) issue of Penthouse magazine as a promotion
in order to establish a readership base for the magazine before its first
release to the newsstands with the April 2000 issue.

Publishing-production, distribution and editorial expenses were $0.7
million for the year ended December 31, 1999. Paper, printing, distribution and
editorial costs were $0.3 million, $0.2 million, $0.1 million and $0.1 million,
respectively.

Selling, general and administrative expenses were $0.2 million for
the year ended December 31, 1999.

AUTOMOTIVE MAGAZINES

Revenues for the Automotive Magazines were $4.9 million and $23.1
million for the years ended December 31, 1999 and 1998, respectively, a decrease
of $18.2 million. This decrease resulted from the sale of the Automotive
Magazines on March 2, 1999 (See note 3 of the Notes To Consolidated Financial
Statements).

ENTERTAINMENT SEGMENT

Revenues from the Entertainment Segment were $16.6 million for the
year ended December 31, 1999, compared to $17.6 million for the year ended
December 31, 1998, a decrease of $1.0 million. The Company's video business
revenues were $2.4 million for the year ended December 31, 1999 compared to $3.3
million for the year ended December 31, 1998, a decrease of $0.9 million. The
decrease is due to a decline in sales through the Company's national wholesale
distributor and to higher sales in the prior period of a videocassette featuring
a well know television personality. Revenues from the Company's pay-per-call
business were $1.5 million and $2.5 million for the year ended December 31, 1999
and 1998, respectively, a decrease of $1.0 million. The decrease is due to a
decline in billable minutes as a result of the general decline within this
industry and an increase in credit card chargebacks at the Company's smaller
service bureaus. The Company's internet business revenues were $12.8 million and
$11.8 million for the year ended December 31, 1999 and 1998, respectively, an
increase of $1.0 million. Internet revenues increased due to increased revenues
received from the sale of memberships to the Company's internet site.

Direct costs were $2.5 million for the year ended December 31, 1999,
compared to $2.2 million for the year ended December 31, 1998, an increase of
$0.3 million. This increase is primarily attributable to increased costs of $0.4
million for the acquisition of video feeds for the Company's internet site and
increased costs of $0.6 million for commissions and fees paid to third party
internet content providers as a result of increased revenue from sites linked to
the Company's internet site. These increases were partially offset by decreased
costs of $0.4 million due a change in service bureaus processing the Company's
pay-per-call business and decreased direct video costs of $0.3 million due to
lower production, distribution, and fulfillment costs as a result of lower sales
volume.

Selling, general and administrative expenses were $5.8 million and
$5.7 million for the year ended December 31, 1999 and December 31, 1998,
respectively, an increase of $0.1 million.

18
<PAGE> 19
CORPORATE ADMINISTRATIVE EXPENSE

Corporate administrative expenses includes executive, legal, human
resources, finance and accounting, management information systems, costs related
to the operation of the corporate and executive offices and various other
expenses. Corporate administrative expenses were $14.8 million for the year
ended December 31, 1999, compared to $18.0 million for the year ended December
31, 1998, a decrease of $3.2 million. This decrease is primarily attributable to
decreased expenses of $1.2 million as a result of the sale of the Automotive
Magazines, expenses of $1.0 million in 1998 related to the relocation of the
Company's corporate headquarters which were not repeated in 1999, decreased
salary expenses ($0.7 million), rent ($0.4 million), and recruitment fees ($0.1
million), partially offset by increased consulting expenses ($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 $0.5 million for
the years ended December 31, 1999 and 1998.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Effective January 1, 1998, the Company changed its presentation of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, whereby income from operations of each business unit excludes
corporate administrative expenses. Corporate administrative expenses include
executive, legal, human resources, finance and accounting, management
information systems and various other expenses. The 1997 period has been
restated to conform to the 1998 presentation.

The Company's revenues were $105.1 million for the year ended
December 31, 1998, compared to revenues of $103.8 million for the year ended
December 31, 1997, an increase of $1.3 million. Newsstand revenues were $46.2
million and $46.6 million for the year ended December 31, 1998 and 1997,
respectively, a decrease of $0.4 million. Newsstand revenues for Mens Magazines
were $41.3 and $42.0 million for the year ended December 31, 1998 and 1997,
respectively, a decrease of $0.7 million. Newsstand revenues from the Automotive
Magazines were $4.9 million and $4.6 million for the year ended December 31,
1998 and 1997, respectively, an increase of $0.3 million. Advertising revenues
were $26.1 million and $25.4 million for the year ended December 31, 1998 and
1997, respectively, an increase of $0.7 million. Advertising revenues from Mens
Magazines decreased $0.6 million and advertising revenues from Automotive
Magazines increased $1.3 million during the period. Subscription revenues were
$11.9 million and $10.9 million for the year ended December 31, 1998 and 1997,
respectively, an increase of $1.0 million. The increase in subscription revenues
is attributable to a $0.5 million increase in subscription revenues from Mens
Magazines and an increase of $0.5 million in subscription revenues from
Automotive Magazines. Revenues for the Entertainment Segment were $17.6 million
and $16.8 million for the year ended December 31, 1998 and 1997, respectively,
an increase of $0.8 million. Revenues from the Company's video business were
$3.3 million and $3.6 million for the year ended December 31, 1998 and 1997,
respectively, a decrease of $0.3 million. Revenues from the Company's
pay-per-call business were $2.5 million and $8.5 million for the year ended
December 31, 1998 and 1997, respectively, a decrease of $6.0 million. Revenues
from the Company's internet business were $11.8 million and $4.7 million for the
year ended December 31, 1998 and 1997, respectively, an increase of $7.1
million.

Income from operations was $5.5 million for the year ended December
31, 1998, compared to $7.4 million for the year ended December 31, 1997. Income
from operations was positively impacted by increased

19
<PAGE> 20
revenues, as discussed above, but was more than offset by increased selling,
general and administrative expenses associated with increased sales, increased
advertising and promotional expenses, increased legal spending and costs
associated with the relocation of the Company's corporate offices in December
1998.

Net non-operating expenses were $9.4 million and $9.3 million for
the year ended December 31, 1998 and 1997, respectively. Included in interest
expense is the amortization of debt issuance costs and discounts of $1.2 million
for the year ended December 31, 1998 and 1997.

Net loss for the year ended December 31, 1998 was ($3.9) million,
compared to ($1.9) million for the year ended December 31, 1997, as a result of
the above discussed factors.

The net revenues and income from operations of the Company were as
follows:

<TABLE>
<CAPTION>
Income
Net Revenue from operations
Year Ended Year Ended
December 31, December 31
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Publishing Segment $ 86.9 $ 87.5 $ 15.8 $ 13.8
Entertainment Segment 16.9 17.6 6.6 9.7
------ ------ ------ ------
$103.8 $105.1 $ 22.4 $ 23.5
Corporate Administrative Expenses (15.0) (18.0)
------ ------ ------ ------
$103.8 $105.1 $ 7.4 $ 5.5
====== ====== ====== ======
</TABLE>

PUBLISHING SEGMENT

The net revenues and income from operations of the Publishing
Segment were as follows :

<TABLE>
<CAPTION>
Income
Net Revenues from operations
Year Ended Year Ended
December 31, December 31,
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Penthouse Magazine and
the Affiliate Publications $63.7 $62.3 $10.1 $ 9.5
Foreign edition licensing 2.3 2.1 1.9 1.7
Automotive Magazines 20.9 23.1 3.8 2.6
----- ----- ----- -----
$86.9 $87.5 $15.8 $13.8
===== ===== ===== =====
</TABLE>

PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS

Revenues for Penthouse magazine and the Affiliate Publications
were $62.3 million and $63.7 million for the year ended December 31, 1998 and
1997, respectively, a decrease of $1.4 million. Newsstand revenue was $41.3
million and $42.0 million for the year ended December 31, 1998 and 1997,
respectively, a decrease of $0.7 million. Penthouse magazine experienced an 8.5%
increase in copies sold. However, the decreased

20
<PAGE> 21
frequency of certain of the Affiliate Publications as well as the discontinued
publication of Penthouse Comix more than offset the increased circulation of
Penthouse. Advertising revenue was $12.3 million and $12.9 million for the year
ended December 31, 1998 and 1997, respectively, a decrease of $0.6 million. The
decrease in advertising revenue is primarily attributable to a 20% decrease in
advertising pages sold in the Affiliate Publications during the year ended
December 31, 1998, compared to the 1997 period. Subscription revenue was $7.7
million and $7.2 million for the year ended December 31, 1998 and 1997,
respectively, an increase of $0.5 million. This increase is attributable to an
increase in subscription copies sold, partially offset by decreased revenue per
copy.

Publishing-production, distribution and editorial expenses were
$32.8 million and $35.4 million for the year ended December 31, 1998 and 1997,
respectively, a decrease of $2.6 million. Paper costs were $12.4 million and
$12.8 million for the year ended December 31, 1998 and 1997, respectively, a
decrease of $0.4 million. The decrease is due to the decrease in the number of
pages per issue and copies printed of certain publications, as well as fewer
issues of certain Affiliate Publications and the discontinued publication of
Penthouse Comix, as noted above. These decreases were partially offset by an
increased cost per pound of paper. Print costs were $12.2 million for the year
ended December 31, 1998, compared to $13.9 million for the year ended December
31, 1997, a decrease of $1.7 million. The decrease is due to the decrease in the
number of pages per issue and copies printed of certain publications, fewer
issues of certain Affiliate Publications and the discontinued publication of
Penthouse Comix, as well as reduced printing costs due to the renegotiation of
the Company's printing contracts in the third quarter of 1997. Distribution
costs were $4.9 million and $5.2 million for the year ended December 31, 1998
and 1997, respectively, a decrease of $0.3 million. The decrease is attributable
to a decrease in copies being distributed, as noted above. Editorial costs were
$3.2 million and $3.5 million for the year ended December 31, 1998 and 1997,
respectively, a decrease of $0.3 million. The decrease is primarily due to lower
spending levels in Penthouse magazine and secondarily to the factors noted
above.

Selling, general and administrative expenses were $19.9 million for
the year ended December 31, 1998, compared to $18.1 million for the year ended
December 31, 1997, an increase of $1.8 million. The increase is primarily
attributable to the increase in bad debt expense related to an uncollectible
advertising accounts receivable of $2.4 million which arose through billings
during the year ended December 31, 1998 in connection with the termination of
the Company's agreement with an advertising agency that had an exclusive
arrangement to sell audiotext advertising in the Company's magazines. The
Company has entered into a new agreement with another advertising agency on
similar terms to that of the prior agreement. Management believes the
termination of the advertising agency will have minimal effect on the results of
the Company's future operations.

FOREIGN EDITION LICENSING

Revenues from licensing of foreign editions, which are included in
net revenue -other, were $2.1 million and $2.3 million for the year ended
December 31, 1998 and 1997, respectively, a decrease of $0.2 million. This
decrease is due primarily to the termination of certain contracts with foreign
licensees of Penthouse magazine.

Selling, general and administrative expenses were $0.4 million for
the year ended December 31, 1998 and 1997.

AUTOMOTIVE MAGAZINES

Revenues for the Automotive Magazines were $23.1 million and $20.9
million for the year ended December 31, 1998 and 1997, respectively, an increase
of $2.2 million. Newsstand revenues were $4.9 million

21
<PAGE> 22
and $4.6 million for the year ended December 31, 1998 and 1997, respectively, an
increase of $0.3 million. The increase is due primarily to increased cover price
of Four Wheeler and Stock Car magazines. Advertising revenues were $13.8 million
and $12.5 million for the year ended December 31, 1998 and 1997, respectively,
an increase of $1.3 million, resulting from an increase in advertising page
rates and pages sold, as well as advertising revenue of $0.4 million generated
from Four Wheeler Television, which produced its first in a series of 13 cable
television shows in February 1998. Subscription revenues were $4.2 million and
$3.7 million for the year ended December 31, 1998 and 1997, respectively, an
increase of $0.5 million due to an increase in subscription copies sold.

Publishing-production, distribution and editorial expenses were $11.3
million and $10.2 million for the year ended December 31, 1998 and 1997,
respectively, an increase of $0.9 million. Paper costs were $4.6 million and
$3.8 million for the year ended December 31, 1998 and 1997, respectively, an
increase of $0.8 million. Paper costs increased due to an increase in magazine
copies printed, increased pages per copy and an increase in the cost of paper.
Print costs were $3.8 million for the year ended December 31, 1998 and 1997.
Distribution costs were $2.5 million and $2.1 million for the year ended
December 31, 1998 and 1997, respectively, an increase of $0.4 million, due to
the increase in copies distributed. Editorial costs were $0.4 million for the
year ended December 31, 1998 and 1997. In 1998, there were $0.5 million in
production costs related to Four Wheeler television.

Selling, general and administrative expenses were $8.8 million and $7.0
million for the year ended December 31, 1998 and 1997, respectively, an increase
of $1.8 million. The increase is primarily attributable to subscription
acquisition spending ($0.7 million), increased salaries, benefits and sales
commissions ($0.3 million), increased advertising expense ($0.3 million),
increased bad debt expense($0.1 million) and increased subscription fulfillment
expense ($0.1 million) related to increased subscription copies distributed
during the year ended December 31, 1998, as compared to the year ended December
31, 1997.

ENTERTAINMENT SEGMENT

Revenues from the Entertainment Segment were $17.6 million for
the year ended December 31, 1998, compared to $16.9 million for the year ended
December 31, 1997, an increase of $0.7 million. The Company's video business
revenues were $3.3 million for the year ended December 31, 1998 compared to $3.6
million for the year ended December 31, 1997, a decrease of $0.3 million. The
decrease is due to a decline in sales through the Company's national wholesale
distributor, partially offset by revenue received from the sale of a
videocassette featuring a well know television personality, revenues received
for a pay-per-view joint venture and increased licensing revenue. Revenues from
the Company's pay-per-call business were $2.5 million and $8.5 million for the
year ended December 31, 1998 and 1997, respectively, a decrease of $6.0 million.
Effective January 1, 1998, the Company engaged a new service bureau to process
its pay-per-call business. Accordingly, revenues during 1998 were lower due to
the transition and due to the arrangement with its new service bureau whereby
the Company receives a fixed rate per minute, on a net basis. The arrangement
with the Company's previous service bureau paid revenue on a gross basis and the
Company paid certain expenses directly. Under the new agreement these expenses
have been eliminated. The Company's internet business revenues were $11.8
million and $4.7 million for the year ended December 31, 1998 and 1997,
respectively, an increase of $7.1 million. Internet revenues increased due to
increased revenues received from the sale of memberships to the Company's
"Private Collection", contained within the Company's internet site. Revenues
were also received from an arrangement whereby the Company receives a minimum
guaranteed revenue from another internet site "linked" to the Company's internet
site. Such arrangement began in April of 1997.

22
<PAGE> 23
Direct costs were $2.2 million for the year ended December 31, 1998,
compared to $6.4 million for the year ended December 31, 1997, a decrease of
$4.2 million. The decrease is due primarily to the change in service bureaus
processing the Company's pay-per-call business, as discussed above.
Additionally, in 1997 the Company incurred $0.5 million in costs related to the
production of a feature motion picture.

Selling, general and administrative expenses were $5.7 million and
$3.8 million for the year ended December 31, 1998 and December 31, 1997,
respectively, an increase of $1.9 million. The increase is due primarily to
higher computer processing, personnel and commission expense relating to the
internet business increased revenues, partially offset by lower promotional
spending related to the video division.

CORPORATE ADMINISTRATIVE EXPENSE

Corporate administrative expenses includes executive, legal, human
resources, finance and accounting, management information systems, costs related
to the operation of the corporate and executive offices and various other
expenses. Corporate administrative expenses were $18.0 million for the year
ended December 31, 1998, compared to $15.0 million for the year ended December
31, 1997, an increase of $3.0 million. The Company relocated its corporate
offices in December 1998 and incurred costs related to the relocation of $1.0
million. In addition, the increase is due to increased salary and benefits
expense ($1.1 million), increased consulting fees ($0.3 million) and increased
legal expense ($0.5 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 $0.5 million for
the year ended December 31, 1998 and 1997.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, the Company had $5.7 million in cash and cash
equivalents, compared to $6.4 million at December 31, 1998. The decrease in cash
and cash equivalents during the year ended December 31, 1999 resulted from net
cash flows provided by investing activities of $34.5 million (primarily due to
the sale of the Automotive Magazines), partially offset by net cash flows used
in operating activities of $7.8 million and cash flows used in financing
activities of $27.5 million (the repurchase of Series B Notes for $26.6
million).

Cash flows from operating activities

Net cash used by operating activities was $7.8 million for the year
ended December 31, 1999, compared to net cash provided by operating activities
of $2.4 million for the year ended December 31, 1998. Net cash used by operating
activities in 1999 was primarily the result of the net loss from operations for
the period before the gain from the sale of the Automotive Magazines, the
settlement of the outstanding assets and liabilities of the Automotive Magazines
which were sold in March 1999, and decreased accounts payable and accrued
expenses due to the timing of payments to vendors . Net cash provided by
operating activities for the year ended December 31, 1998 was primarily a result
of an increase in accounts payable and accrued expenses due to the timing of
payments to vendors in connection with the relocation of the Company's corporate
office in December 1998. The subsequent payment of the relocation expenses
resulting in a $1.5 million decrease in accounts payable and accrued expenses in
1999.

23
<PAGE> 24
Cash flows from investing activities

Cash provided by investing activities for the year ended December
31, 1999 was $34.5 million, compared to cash used in investing activities of
$1.9 million for the year ended December 31, 1998. Cash provided by investing
activities for the year ended December 31, 1999 was primarily the result of the
sale of the Automotive Magazines (See Note 3 of the Notes To Consolidated
Financial Statements) for $35.0 million and a net decrease of $0.1 million in
its loan to GMI's principal shareholder, offset by capital expenditures of $0.6
million. Cash used in investing activities in 1998 was primarily due to the
purchase of fixed assets and leasehold improvements related to the Company's
relocation to new corporate offices in December of 1998. The Company expended
$2.8 million for renovations, but was reimbursed $1.1 million by its new
landlord. Additionally, the cash used in investing activities in 1998 includes
an increase of $0.2 million in its loan to GMI's principal shareholder.

Cash flows from financing activities

Cash flows used in financing activities were $27.5 million for the
year ended December 31, 1999, compared to cash flows used in financing
activities of $1.4 million for the year ended December 31, 1998. Cash flows used
in financing activities was primarily the result of the purchase of $26.6
million of the Company's Series B Notes (See Note 6 of the Notes To Consolidated
Financial Statements).

Affiliated company advances at December 31, 1999 increased $0.9
million from the December 31, 1998 balance, whereby the Company is due expense
reimbursement of $3.0 million by GMI as of December 31, 1999. These balances
regularly result from the impact of certain cost sharing and expense allocation
agreements with GMI and its subsidiaries, whereby certain costs, such as shared
corporate salaries and overhead, are paid by the Company and a portion charged
to GMI and its subsidiaries as incurred. These charges generally result in
amounts due to the Company, and are to be repaid sixty days after the end of
each quarter in accordance with the terms of an expense sharing agreement.
During the year ended December 31, 1999, the Company received a partial payment
in the amount of $2.1 million in cash and in June 1998, the Company received the
outstanding stock of a subsidiary of GMI, whose net assets consisted of fine
arts which have an appraised value of approximately $0.5 million. During the
first three months of 2000, the Company made non-permitted advances of
approximately $1.0 million to GMI that caused non-compliance with certain
covenants of the Indenture. This amount was repaid in March 2000 by a transfer
to the Company of the outstanding stock of a subsidiary of GMI whose net assets
have an appraised value of $1.8 million consisting of works of art and other
valuables. The remaining balance of $0.8 million was applied against the
outstanding receivable from GMI. The management of the Company believes that GMI
and its subsidiaries have sufficient assets to enable the Company to ultimately
recover its advance through liquidation of certain of those assets or through
refinancing of GMI's debts. The ability of the Company to realize repayment of
its advance is dependant upon the success of GMI in refinancing its existing
debt obligations, some of which are currently in default. The principal
shareholder of GMI has guaranteed the full amount due to the Company. At
December 31, 1999, the Company has a loan outstanding to the principal
shareholder of GMI of $0.9 million. The loan is evidenced by a promissory note,
bears interest at 11% per annum, and is payable on December 31, 2000.

The ability of the Company to incur additional debt is severely
limited by the terms of its Notes and the Indenture. Pursuant to the Indenture,
the Company may not declare a dividend on its common stock, subject to certain
exceptions, unless it meets certain financial covenants set forth therein. In
May 1998, the Company declared and paid a $0.4 million cash dividend to GMI in
accordance with the terms and conditions of the Indenture.

24
<PAGE> 25
Future outlook

The Company's cash balance at December 31, 1999 was $5.7 million,
however the Company has sustained net losses (before the Gain on Sale of
Automotive Magazines) from operations in recent years, and in 1999, the Company
used, rather than provided, cash in its operations. Further, at December 31,
1999, current liabilities exceeded current assets by approximately $59,685,000
and total liabilities exceeded total assets by $56,703,000. The Company has a
$2.8 million semiannual interest payment due on each of June 30, 2000 and
December 31, 2000. The Company's Series B Notes ("the Notes") totaling $52
million mature on December 31, 2000. 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 and there can be no assurance that the Company will be able
to find a source of funding for the refinancing of 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 Series B Notes. In the event that the Company cannot repay the Series
B Notes, the trustee, under the Indenture, could assume control over the Company
and substantially all its assets, including its registered trademarks. Should
the Company be forced to cease operations and liquidate its assets, it would
most likely be unable to recover the full carrying amounts of the assets shown
on the balance sheet.

The Company has undertaken several actions to achieve future
profitability and improve cash flow. There can be no assurance that management
will be able to achieve such plans. These actions are as follows:

(1) Improve revenue by increasing the cover price of certain of its
publications.

(2) Decrease production costs of its magazines by reducing the number of
newsstand copies its prints (through increased newsstand sales efficiencies
and overall print order reductions), changing the paper grades on
substantially all its publications, reducing the number of pages per issue
of certain publications, and discontinuing Hot Talk, which was an
unprofitable publication.

(3) Decrease selling, general and administrative expenses by reducing the
number of employees, professional fees, advertising costs and other
selling, general and administrative expenses as a result of restructuring
the Company's operations.

In addition, the Company is actively seeking to secure a source of funding for
the refinancing of its Notes.

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 the Company can
achieve profitability and that as to a refinancing of its Series B 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.

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<PAGE> 26
ITEM 7A. 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 December 31, 1999, the Company had debt of
$51.8 million with a fixed rate of 10 5/8%. The Company is subject to market
risk based on potential fluctuations in current interest rates.

Foreign-Exchange Rate Risk-The Company does not believe it has
exposure to foreign exchange rate risk because all of its financial instruments
are denominated in U.S. dollars.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See page F-1 for an index to the Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

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<PAGE> 27
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The directors of the Company serve until the next annual meeting
of stockholders or until their successors are elected and qualified. The
executive officers serve at the discretion of the Board of Directors in the
absence of employment agreements. The following information is submitted with
respect to each director and executive officer of the Company at March 17, 2000.

<TABLE>
<CAPTION>
Date Date
Elected Elected to
Positions Presently Held with the as Present
Name Age Registrant Director Office
- ------------------------- --- -------------------------------------------- -------------- --------------
<S> <C> <C> <C> <C>
Robert C. Guccione Director, Chairman of the Board, 1993 1993
69 Publisher

Nina Guccione 40 Director, Executive Vice President, 1998 1998
President- New Media, Secretary

John D. Orlando 45 Director, Senior Vice President, 1999 1998
Chief Financial Officer and
Treasurer

Laurence B. Sutter 56 Senior Vice President, General -- 1997
Counsel, Assistant Secretary

William F. Marlieb 71 Director 1993 --

John L. Decker 63 Director 1993 --

Phyllis Schwebel 72 Director 1993 --
</TABLE>

The business experience for the last 5 years of the current directors and
executive officers of the Company and those individuals who were directors or
executive officers during 1999 is presented below.

ROBERT C. GUCCIONE has been a Director, Chairman of the Board and Publisher of
the Company since 1993 and prior to January, 1998 was also Chief Executive
Officer of the Company. Mr. Guccione founded Penthouse Publications in London in
1965 after having served as managing director and editor-in-chief of London
American, a weekly newspaper.

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<PAGE> 28
NINA GUCCIONE has been a Director, Executive Vice President, President- New
Media and Secretary of the Company since February 1998. Prior to the appointment
to her current position, Ms. Guccione was Executive Vice President- New Media
and Secretary of the Company since 1996. Ms. Guccione has served in various
capacities within the Company for in excess of five years. Ms. Guccione is the
daughter of Robert C. Guccione.

JOHN D. ORLANDO has been a Senior Vice President-Chief Financial Officer and
Treasurer of the Company since August 1998 and a Director since March 1999.
Prior to joining the Company, Mr. Orlando was the President of Konica
Environmental Products Division of Konica Graphic Imaging International, Inc.
(Konica) from 1997 to 1998 and was the Senior Vice President-Chief Financial
Officer-Treasurer and Secretary of Konica from 1987 to 1997. Mr. Orlando is a
certified public accountant.

LAURENCE B. SUTTER has been a Senior Vice President, General Counsel and
Assistant Secretary of the Company since January 1997. Prior to his appointment
to his current position, Mr. Sutter was Associate Counsel/Publications and
Assistant Secretary. Mr. Sutter has been employed by the Company or its
affiliates since 1982 and has been a practicing attorney since 1977.

WILLIAM F. MARLIEB is a Director of the Company. Mr. Marlieb was
President/Marketing, Sales and Circulation of the Company until his retirement
in April 1997. He has been associated with the Company or its affiliates for 24
years. Prior to joining an affiliated company in 1973, he was President of
Tilley Marlieb Advertising, Inc. Mr. Marlieb is a past President and Chairman of
the Advertising Club of New York.

JOHN L. DECKER is a Director of the Company. Since 1983, he has been President
of Decker & Associates, the publisher of The Advertiser and Agency magazines.
From 1978 to 1983, Mr. Decker was Senior Vice President and Group Publisher of
Knapp Communications, which is responsible for the advertising and circulation
of Architectural Digest, Bon Appetit, Go, and Home magazines. Mr. Decker
received his B.S. in Economics from Villanova University.

PHYLLIS F. SCHWEBEL is a Director of the Company. Since 1992, she has been
President of The Garth Company, a strategic marketing organization. From 1983
through 1991, Ms. Schwebel was Manager of Market Research for Time magazine and
Manager of Corporate Management Research for Time Inc. Ms. Schwebel is a member
of the Board of Directors of the American Advertising Federation and immediate
past Chairman of its Counsel of Governors. She holds a B.A. from The City
University of New York.

ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes the compensation for services
rendered to the Company during fiscal years 1997, 1998 and 1999 by (i) the
Company's Principal Executive Officer*, Robert C. Guccione, and (ii) each of the
Company's other most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 and whose compensation is required to be
disclosed under S.E.C. rules. The compensation for all such officers represents
the amounts paid by the Company in respect thereof pursuant to the Properties
and Salary Allocation Agreement (for Mr. Guccione and Ms. Keeton) and the
Expense Allocation Agreement and employment agreements (for all other such
officers). See "Certain Relationships and Related Transactions."

- -----------

*Mr. Guccione was Chief Executive Officer during 1997 and currently functions as
principal executive officer. During 1998, Mr. Robert Altman was Chief Executive
Officer.

28
<PAGE> 29
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation
- --------------------------------------------- ------------------------------------------------------------

Year Salary(1) Bonus Other (3)
--------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Robert C. Guccione 1999 $ 1,530,000 $ 674,124
Chairman and Publisher 1998 $ 1,530,000 $ 450,000 $ 704,740
1997 $ 1,530,000 $ 233,855

Nina Guccione 1999 $ 190,000
Executive Vice President 1998 $ 176,716
President-New Media

Kathryn Keeton Guccione (2) 1997 $ 347,114 $ 233,855
Vice Chairman

Robert A. Altman (4) 1998 $ 370,828 $ 142,500
President and Chief Executive Officer

Eugene Boffa, Jr. (5) 1998 $ 292,370
President and Chief Operating Officer 1997 $ 398,739

Patrick J. Gavin (6) 1998 $ 345,838
Executive Vice President 1997 $ 347,949
Chief Operating Officer

John D. Orlando 1999 $ 190,000
Senior Vice President-Chief Financial
Officer and Treasurer

Lawrence B. Sutter 1999 $ 159,015
Senior Vice President, General Counsel 1998 $ 151,095
and Assistant Secretary 1997 $ 148,575
</TABLE>

(1) Executive officer compensation is determined pursuant to the allocation
provisions of the Properties and Salary Allocation Agreement and the
Expense Allocation Agreement referred to above. The allocations were
approved by the nonemployee members of the Board of Directors of the
Company. See "Compensation Committee Interlock and Insider Participation
in Compensation Decisions" and "Certain Relationships and Related Party
Transactions."

(2) Deceased as of September 1997.

(3) Other compensation represents life insurance premiums paid on behalf of
Mr. and Mrs. Guccione, under split dollar policy arrangements. In 1997,
one-half of the total premium paid is allocated above to each of Mr. and
Mrs. Guccione.

(4) Employment terminated in December 1998.

29
<PAGE> 30
(5) In 1997, salary represents $115,200 under a consulting arrangement and
$283,539 in salary. Employment terminated in December 1997

(6) Employment terminated in March 1999.

COMPENSATION OF DIRECTORS

Directors who are also employees of the Company or any of its
subsidiaries do not currently receive any additional compensation for serving as
a director or committee member or for attending Board or committee meetings. All
other directors receive an annual retainer of $5,000 plus $1,000 for each Board
meeting and committee meeting attended.

COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During 1999, two non-employee directors, Mr. Decker and Ms. Schwebel
(the "Non-employee Members"), who have never served as officers of the Company
or been employees of the Company, acted as the Company's Compensation Committee.
Mr. Avrett (who died in August 1997) was a member of the committee up until the
time of his death and was the Chairman of the Board and a principal of the firm
Avrett, Free and Ginsberg which provides advertising services to the Company.
The Company paid Avrett, Free & Ginsberg approximately $0.2, $0.2 and $.5
million for advertising services in 1999, 1998 and 1997, respectively. See
"Certain Relationships and Related Transactions."

The salaries of Mr. Guccione and Ms. Keeton are determined and paid
by GMI. The Non-employee Members reviewed and approved the reimbursement of GMI
by the Company in an amount equal to the portion of the salaries of Mr. Guccione
and Ms. Keeton allocated to the Company pursuant to the Properties and Salaries
Allocations Agreement. In addition, the Non-employee Members reviewed and
approved the expenses allocated to the Company for its use of the Townhouse
pursuant to the Properties and Salary Allocation Agreement. See "Certain
Relationships and Related Transactions."

RETIREMENT SAVINGS PLAN

The General Media Communications, Inc. Employees' Retirement Savings
Plan and Trust (the "Plan") is a tax-exempt defined contribution plan covering
all employees of GMI and its affiliates (including the Company) who have
completed 1,000 hours of service in one plan year and are twenty-one years of
age or older. GMI may make contributions to the Plan from its current profits,
before profit-sharing costs and income taxes, in each plan year, in such amounts
as authorized by the Board of Directors of GMI, provided that the amount of the
contribution for each plan year does not exceed 3% of the qualified earnings of
each participant. Participants may contribute up to 15% of their annual wages
before bonuses and overtime up to a maximum pre-tax contribution of $10,000 in
1999. Participant's accounts are credited with the participant's contribution
and an allocation of (a) GMI's contribution, if any, (b) Plan earnings, and (c)
forfeitures of terminated participants' nonvested accounts, if any. Allocations
are based on participant earnings on account balances. The benefit to which a
participant is entitled is the benefit that can be provided from the
participant's account. Participants are immediately vested in their pre-tax
contributions plus actual earnings thereon. Vesting in the remainder of their
accounts begins after completing two years of service and vests in equal amounts
until the participant has completed five years of service, at which time the
participant becomes 100% vested. Under the Plan, participating employees can
allocate funds in their account among several investment options. Upon
termination of service, a participant may elect to receive an amount equal to
the vested value of his or her account, in either a lump-sum or in monthly,
quarterly, or semiannual payments from the Plan over a period not extending
beyond the life expectancy of the participant and his or her spouse. As of
December 31, 1999, Robert Guccione, Lawrence Sutter and Nina Guccione were 100%
vested in profit sharing contributions. Amounts contributed by GMI, if any, on
behalf of employees who performed services for the Company are reimbursed to GMI
by the

30
<PAGE> 31
Company pursuant to the Expense Allocation Agreement. See "Certain Relationships
and Related Transactions." The Company did not make any contributions to the
Plan in fiscal years 1997, 1998 and 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

All of the issued and outstanding Common Stock of the Company is
owned by GMI. The following table sets forth certain information regarding the
beneficial ownership of GMI's common stock as of March 17, 2000.

<TABLE>
<CAPTION>
GMI Shares Percent
Name and Address Common Stock(1) Beneficially Owned of Class
- ---------------- --------------- ------------------ --------
<S> <C> <C> <C>
Robert C. Guccione Class A 6.67 66.7%
16 East 67th Street Class B 0.00 0.0
New York, New York 10022

Robert C. Guccione Family Class A 3.33 33.3
Trust No. 1 Class B 1.62 100.0
</TABLE>

(1) Holders of Class A and Class B common stock have equal voting rights and
are entitled to one vote per share.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

GMI owns (together with Robert C. Guccione, who owns a 1%
interest and utilizes such facilities as his residence and his executive
offices) a Townhouse. The Townhouse is used for various Company related
activities, including business meetings, client entertainment, charitable
functions, magazine photography sessions and promotional and marketing events.
Expenses of maintaining the Townhouse, as well as any applicable debt service
requirements, are the responsibility of GMI. Pursuant to the Properties and
Salary Allocation Agreement among the Company, GMI and a GMI subsidiary, the
Company reimbursed GMI in the amounts of approximately $0.5 million in 1997,
1998 and 1999, for the use of the Townhouse for Company purposes. See
"Compensation Committee Interlock and Insider Participation in Compensation
Decisions."

The Properties and Salary Allocation Agreement also provides that
the salaries of Mr. Guccione and Ms. Keeton are determined and paid by GMI.
Pursuant to this agreement, the Company reimburses GMI for a portion of such
salaries based upon an allocation of the relative business time spent by Mr.
Guccione and Ms. Keeton on GMI related business and on Company related business.
In 1999, 1998 and 1997, the Company reimbursed GMI in the amounts of
approximately $1.5 million , $2.0 million and $1.9 million, respectively, for
the allocable amount of Mr. Guccione's and Ms. Keeton's (for 1997) salaries.

GMI, the Company and the Other GMI Subsidiaries are parties to
the Tax Sharing Agreement pursuant to which such parties file consolidated
federal, state and local income tax returns so long as permitted by the relevant
tax authorities. The Tax Sharing Agreement sets forth the methodology for
allocating income taxes and the use of net operating losses ("NOLs") between the
Company, GMI and the Other GMI Subsidiaries. The Company, however, is not
required to pay income or franchise taxes (except certain alternative taxes) to
the extent that it can utilize a portion of the NOLs of GMI and the Other GMI
Subsidiaries pursuant to the terms of the Tax Sharing Agreement. The Company is
not required to reimburse GMI and the Other GMI Subsidiaries for the use of the
NOLs generated by these entities until after all of the Series B Notes are
redeemed or paid, and

31
<PAGE> 32
then only for the NOLs used in that or any subsequent year. In addition, the Tax
Sharing Agreement provides that GMI and the other GMI Subsidiaries indemnify the
Company from any income or franchise tax liabilities of the consolidated group
in excess of the $26 million arising during years ending through December 31,
1993.

The Company, GMI and the other GMI Subsidiaries also have entered
into an Expense Allocation Agreement, which sets forth the methodology for
allocating common expenses as among the parties to the Expense Allocation
Agreement including expenses related to the use of and occupancy costs for the
Company's principal corporate offices in New York City. Pursuant to the Expense
Allocation Agreement, items of common expense are allocated primarily on the
basis of estimates of time spent and space occupied by relevant personnel,
including executive personnel (other than Mr. Guccione), data processing,
accounting, production and sales support and administrative personnel. The
Company pays such combined expenses and allocates to GMI and the Other GMI
Subsidiaries the portions due by such companies. Costs incurred directly by
subsidiaries of the Company solely for their benefit are paid directly by such
companies, as are direct costs incurred by the Other GMI Subsidiaries solely for
their benefit.

In October 1997, Mr. Guccione was granted a loan in the amount of
$1.2 million from a company that had simultaneously entered into an agreement
with the Company to provide services for the Company's pay-per-call business.
The loan was in consideration of Mr. Guccione personally guaranteeing all
material obligations of the Company under the agreement. Payment on the loan may
be demanded, with interest at 9% per annum, no earlier than December 31, 2001.
If the note is repaid in full prior to June 30, 2001, the unpaid principal
amount of the loan is reduced by $500,000.

At December 31, 1999, the Company had a $0.9 million loan
receivable from Mr. Guccione, pursuant to a promissory note. Such loan bears
interest at 11% per annum and is due on December 31, 2000.

At December 31, 1999, the Company had a $1.1 million loan
receivable from a foreign company which is principally owned by Mr. Guccione.
Such loan bears no interest, is due on demand and is personally guaranteed by
Mr. Guccione.

The Company utilizes the services of Avrett, Free & Ginsberg, an
advertising agency. Such agency provides for the design and placement of media
advertising. Mr. Jack Avrett, a director of the Company until his death in
August 1997, was a principal of such firm. The Company paid Avrett, Free &
Ginsberg approximately $0.2, $0.2 and $.5 million for advertising services in
1999, 1998 and 1997, respectively.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are being filed as part of this Report:

(1) See page F-1 for an index of consolidated financial statements.

(2) See page F-1 for an index of financial statement schedules.

(3) Exhibits:

32
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
*3.1 -- Certificate of Incorporation of the Company, filed with the Secretary of State of
Delaware on November 9, 1993.

*3.2 -- By-Laws of the Company.

*4.1 -- Indenture, dated as of December 21, 1993, between the Company and IBJ Schroder
Bank & Trust Company, as trustee ("Trustee"), containing, as exhibits, specimens
of Series A Notes and Series B Notes.

*4.2 -- Registration Rights Agreement, dated as of December 21, 1993, between the
Company and the Underwriters.

*4.3 -- Security Agreement, dated December 21, 1993, between the Company and Trustee.

*4.4 -- Pledge Agreement, dated December 21, 1993, between the Company and Trustee.

*4.5 -- Copyright Security Agreement, dated December 21, 1993, between the Company
and Trustee.

*4.6 -- Trademark Security Agreement, dated December 21, 1993, between the Company
and Trustee.

+*10.1 -- Distribution Agreement, dated September 19, 1977, among Curtis Circulation,
Penthouse International, Ltd., Forum International, Ltd., Viva International, Ltd.,
Penthouse Photo World, Ltd. and Penthouse Poster Press, Ltd.; Amendment No. 1,
undated; Amendment No. 2, dated September 8, 1982; Amendment No. 3, dated
March 18, 1985; and Amendment No. 4, dated February 1, 1986.

+*10.2 -- Printing Agreement, dated April 30, 1980, between Penthouse International, Ltd.
and Meredith Corporation (to print Penthouse); Amendment, dated October 23,
1986; Addendum #8, dated November 7, 1986; Amendment, dated December 8,
1986; Addendum, dated March 20, 1987; Amendment, dated November 3, 1987;
Addendum, dated March 15, 1990; Addendum, dated June 15, 1990; and
Amendment and Extension, dated September 1, 1992.

+*10.3 -- Printing Agreement, dated May 13, 1987, between Penthouse International, Ltd. and
Meredith/Burda (to print Girls of Penthouse); Addendum, dated March 15, 1990;
Addendum, dated June 15, 1990; and Amendment and Extension, dated September
1, 1992.

+*10.4 -- Printing Agreement, dated July 20, 1993, among Hot Talk Publications, Ltd.,
Penthouse Letters, Ltd., General Media International, Inc. and R.R. Donnelley &
Sons Co. (to print Hot Talk and Penthouse Letters).

*10.5 -- Warrant Agreement, dated December 21, 1993, between the Company and Trustee.

*10.6 -- Properties and Salary Allocation Agreement, dated December 21, 1993, among the
Company, GMI and Locusts on the Hudson River Corp.
*10.7 -- Expense Allocation Agreement, dated December 21, 1993, among the Company,
GMI and the Other GMI Subsidiaries.
</TABLE>

33
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
*10.8 -- Tax Sharing and Indemnification Agreement, dated December 21, 1993, among the
Company, GMI and the Other GMI Subsidiaries.

+10.9 -- Circulation Subscription Fulfillment Services Agreement, dated September 15,
1994, between Palm Coast Data, Ltd., Penthouse International, Ltd., Omni
Publications International, Ltd., Longevity International, Ltd., Four Wheeler
Publishing, Ltd., Stock Car Racing Publications, Inc., Open Wheel Publications,
Inc., Super Stock Publications, Inc., Forum International, Ltd. and Variations
Publishing International, Ltd.; Amendment, dated September 16, 1994
(incorporated by reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).

10.10 -- Employment Agreement, dated December 17, 1997, between the Company and
Robert H. Altman.** (incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).

10.11 -- Retirement Agreement, effective April 4, 1997, between the Company and William
F. Marlieb.**(incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).

+10.12 -- Amendment and Extension by and among R.R. Donnelly & Sons and General
Media International, Inc., General Media, Inc., General Media Communications, Inc.
and General Media Automotive Group, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).

+10.13 -- Printing Contract between Access Printing and General Media Communications,
Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998).

10.14 -- Agreement of Lease between M393 Associates LLC and General Media, Inc.
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998).

10.15 -- Asset Sale and Purchase Agreement between EMAP Petersen, Inc. and General
Media Automotive Group, Inc. dated as of February 9, 1999 (incorporated by
reference to exhibit 10.21 to the Company's Current Report on Form 8-K dated
March 2, 1999).

12.1 -- Computation of ratio of earnings to fixed charges.

21.1 -- Subsidiaries of the Company.

27 -- Financial Data Schedule.
</TABLE>

- ---------------------

34
<PAGE> 35
* Previously filed with Registration Statement No. 33-76716 on Form S-4,
and incorporated herein by reference to such Registration Statement.

** Compensatory arrangement.

+ Confidential treatment has been granted with respect to certain
information contained in this exhibit.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed by the Company during the fourth
quarter of 1999.

See paragraph (a)(3) above for a listing of items filed as exhibits to
this Form 10-K as required by Item 601 of Regulation S-K.

(d) Financial Statement Schedules:

See page F-1 for an index of financial statement schedules filed as part
of this Form 10-K.

<PAGE> 36
GENERAL MEDIA, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES

Page

<S> <C>
Report of Independent Certified Public Accountants F-2

Financial Statements

Consolidated Balance Sheets, December 31, 1998 and 1999 F-3 - F-4

Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1998 and 1999 F-5

Consolidated Statement of Stockholder Deficiency for the Years
Ended December 31, 1997, 1998 and 1999 F-6

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 F-7 - F-8

Notes to Consolidated Financial Statements F-9 - F-24

Report of Independent Certified Public Accountants on Schedule S-1

Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>

All other schedules are omitted because they are not applicable or the required
information is contained in the financial statements or notes thereto.

F-1

<PAGE> 37

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
GENERAL MEDIA, INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheets of General Media,
Inc. (a Delaware corporation and wholly-owned subsidiary of General Media
International, Inc.) and Subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholder deficiency and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of General Media,
Inc. and Subsidiaries as of December 31, 1998 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a loss of $8,051,000 before income from certain
non-recurring items during the year ended December 31, 1999, and, as of that
date, the Company's current liabilities exceeded its current assets by
$59,685,000 and its total liabilities exceeded its total assets by $56,703,000.
These factors, among others, as discussed in Note 2 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ GRANT THORNTON LLP
GRANT THORNTON LLP

New York, New York
March 3, 2000 (except for Note 6, as to which
the date is March 27, 2000)

F-2
<PAGE> 38

General Media, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,
(amounts in thousands)

ASSETS 1998 1999
------ ---- ----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,432 $ 5,659
Accounts receivable, net of allowance for
doubtful accounts of $918 in 1998 and
$1,122 in 1999 9,083 6,801
Inventories 4,658 4,523
Due from affiliated companies 2,143 2,996
Prepaid expenses and other current assets 3,378 1,474
Loan to shareholder 985 862
-------- --------

Total current assets 26,679 22,315

PROPERTY AND EQUIPMENT - AT COST,
net of accumulated depreciation and amortization 3,743 3,372

OTHER ASSETS
Rent security deposits 1,764 1,504
Loan to affiliated company 1,086 1,086
Deferred debt issuance costs, net 1,998 720
Deferred subscription acquisition costs, net 3,041 397
Intangible assets, net 2,577
Other 1,060 910
------- --------

11,526 4,617
------ -------

$41,948 $30,304
====== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 39

General Media, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31,
(amounts in thousands)

LIABILITIES AND STOCKHOLDER DEFICIENCY 1998 1999
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of Senior Secured Notes $ 51,847
Accounts payable $16,538 12,298
Accrued retail display allowances 2,242 2,233
Deferred revenue 13,529 8,954
Other liabilities and accrued expenses 2,930 5,649
Income taxes payable 254 1,019
--------- --------
Total current liabilities 35,493 82,000

SENIOR SECURED NOTES 79,645

UNEARNED REVENUE 3,089 2,066

OTHER NONCURRENT LIABILITIES 1,150

COMMITMENTS AND CONTINGENCIES

REDEEMABLE WARRANTS 1,791 1,791

STOCKHOLDER DEFICIENCY
Common stock, $.01 par value; authorized, 1,000,000
shares; issued and outstanding, 475,000 shares 5 5
Capital in excess of par value 1,418 2,898
Accumulated deficit (79,493) (59,606)
------- -------

(78,070) (56,703)
------- -------

$ 41,948 $ 30,304
======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 40

General Media, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,
(amounts in thousands)

1997 1998 1999
--------- --------- ------

<S> <C> <C> <C>
Net revenues
Publishing
Newsstand $ 46,635 $ 46,179 $39,153
Advertising 25,372 26,061 12,583
Subscription 10,895 11,881 7,776
Other 4,016 3,382 2,701
Entertainment 16,842 17,647 16,598
-------- -------- ------

103,760 105,150 78,811
------- ------- ------

Operating costs and expenses
Publishing - production, distribution and
editorial 45,586 44,095 34,449
Entertainment - direct costs 6,363 2,672 2,494
Selling, general and administrative 41,998 50,523 41,229
Rent expense from affiliated companies 548 523 542
Depreciation and amortization 1,873 1,815 941
--------- --------- ---------

Total operating costs and expenses 96,368 99,628 79,655
--------- --------- ------

Income (loss) from operations 7,392 5,522 ( 844)

Other income (expense)
Gain on sale of Automotive Magazines 30,657
Interest expense (9,918) (9,918) (7,969)
Interest income 611 517 762
---------- ---------- --------

Income (loss) before taxes and
extraordinary
item (1,915) (3,879) 22,606

Income taxes (3,390)

Income (loss) before extraordinary
item (1,915) (3,879) 19,216

Extraordinary gain from early extinguishment of
debt, net of income taxes of $15 in 1999 671
------------- -------------- --------

NET INCOME (LOSS) $ (1,915) $ (3,879) $19,887
========= ========= ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 41

General Media, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDER DEFICIENCY

Years ended December 31, 1997, 1998 and 1999
(amounts in thousands)

Capital in
Common excess of Accumulated
stock par value deficit Total
------ ---------- ----------- -----

<S> <C> <C> <C> <C>
Balance - January 1, 1997 $5 $1,418 $(73,299) $(71,876)

Net loss for the year (1,915) (1,915)
-- ------- -------- ---------

Balance - December 31, 1997 5 1,418 (75,214) (73,791)

Net loss for the year (3,879) (3,879)
Less cash dividend paid (400) (400)
-- ------- ------- -------

Balance - December 31, 1998 5 1,418 (79,493) (78,070)

Net income for the year 19,887 19,887
Contribution to capital by Parent Company 1,480 1,480
-- ----- -------- ---------

BALANCE - DECEMBER 31, 1999 $5 $2,898 $(59,606) $(56,703)
= ====== ======= =======

</TABLE>

The accompanying notes are an integral part of this statement.

F-6
<PAGE> 42

General Media, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,
(amounts in thousands)

1997 1998 1999
--------- --------- ---------

<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(1,915) $(3,879) $ 19,887
------ ------ -------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 1,873 1,815 941
Amortization of bond costs 1,166 1,168 971
Amortization of unearned revenue (1,461) (1,610) (1,023)
Extraordinary gain from early extinguishment
of debt (686)
Noncash contribution by Parent Company 1,480
Gain on disposition of Automotive Magazine
assets (30,657)
Loss from disposal of property and
equipment 725
Changes in operating assets and liabilities
Accounts receivable 2,574 94 895
Inventories 866 439 135
Other current assets (888) 202 1,562
Other assets (709) (1,564) 1,788
Accounts payable and accrued expenses (300) 3,366 (5,233)
Income taxes payable (305) (118) 765
Deferred revenue 834 1,781 220
Other long-term liabilities 1,150
---------- ---------- ---------

3,650 6,298 (27,692)
------ ------ -------

Net cash provided by (used in) operating
activities 1,735 2,419 (7,805)
------ ------ --------

Cash flows from investing activities
Proceeds from sale of Automotive Magazines 35,000
Capital expenditures (335) (2,752) (638)
Proceeds from office relocation 1,105
Loan to shareholder (732) (253) (77)
Repayment from shareholder 200
---------- ---------- ---------

Net cash provided by (used in) investing
activities (1,067) (1,900) 34,485
------ ------ -------
</TABLE>

F-7
<PAGE> 43

General Media, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Year ended December 31,
(amounts in thousands)

1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Purchase of Senior Secured Notes $(26,600)
Advance to affiliated companies $ (524) $(1,465) (2,971)
Repayments from affiliated companies 470 2,118
Dividends paid (400)
----------- ----------- -----------

Net cash used in financing activities (524) (1,395) (27,453)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 144 (876) (773)

Cash and cash equivalents at beginning of year 7,164 7,308 6,432
------ ------ --------

Cash and cash equivalents at end of year $ 7,308 $ 6,432 $ 5,659
====== ====== ========

Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 8,720 $ 8,720 $ 6,996
Income taxes 481 118 1,120

</TABLE>

The accompanying notes are an integral part of these statements.

F-8
<PAGE> 44

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1999

NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES

General Media, Inc. and Subsidiaries (the "Company"), a wholly-owned
subsidiary of General Media International, Inc. ("GMI"), is a publishing
and entertainment company engaged in the production and sale of men's
magazines, various entertainment products, and until March 1999, automotive
magazines and an automotive television series. Penthouse is the most
significant trademark of the Publishing segment and is used extensively in
magazine publishing and foreign edition licensing. In December 1999, the
Company launched a new magazine called Mind & Muscle Power which targets
the men's health magazine market. The Company's operations are located
primarily in New York City, and the Company has a broad customer base.

A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:

a. Principles of Consolidation

The consolidated financial statements include the accounts of the
Company and all its subsidiaries. All significant intercompany
transactions and balances have been eliminated.

b. Revenue Recognition

Sales of magazines for retail distribution are recorded on the on-sale
date of each issue based on an estimate of the revenue for each issue
of the magazine, net of estimated returns. Estimated revenues are
adjusted to actual revenues as actual sales information becomes
available. The Company receives an advance payment from its distributor
at the on-sale date of each issue.

Revenues from advertising are recognized on the on-sale date of each
issue in which the advertising was included.

F-9
<PAGE> 45

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 1 (CONTINUED)

Revenues from the sale of magazine subscriptions are recognized over
the term of the subscriptions.

Revenues from the sales of films and video cassettes are recognized in
the period in which the product is shipped. Returns are generally not
material. Revenues from product and trademark licensing are recorded in
the period in which earned.

Revenues from the sale of memberships to the Company's internet site
are recognized over the term of the membership.

Revenues from pay-per-call programs are recorded in the period in which
the calls are made.

c. Inventories

Paper and printing costs are valued at the lower of cost (first-in,
first-out method) or market. Editorials and pictorials are valued at
actual cost. Film and programming costs are the direct cost of
production, less amounts amortized over the expected period of revenue,
generally twelve months from the film release date.

d. Deferred Subscription Acquisition Costs

The costs of acquiring subscriptions related to direct response
marketing are deferred and amortized over the life of the
subscriptions, generally twelve to eighteen months. Amortization of
these costs is done on a cost-pool-by-cost-pool basis over the period
during which the future benefits are expected to be received.

e. Property and Equipment

Property and equipment are stated at cost. Depreciation is provided by
the straight-line method based upon the estimated useful lives of the
assets. Furniture and equipment and computer hardware and software are
depreciated over five years and leasehold improvements are depreciated
over the life of the lease.

F-10
<PAGE> 46

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 1 (CONTINUED)

f. Intangible Assets

Intangible assets are specific advertising accounts, subscriber lists,
circulation lists and goodwill related to the automotive magazines. The
intangible assets were eliminated as part of the sale of the automotive
magazines in March 1999.

Amortization expense is approximately $616,000, $617,000 and $103,000
for the years ended December 31, 1997, 1998 and 1999, respectively.

Accumulated amortization was approximately $7,911,000 at December 31,
1998.

g. Statement of Cash Flows

The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.

h. Management Charges

The Company incurs shared common indirect expenses for the benefit of
GMI and affiliated companies, including accounting, personnel, data
processing, employee relations and other administrative services. In
addition, the Company is charged by GMI and its subsidiaries for other
corporate overhead costs, executive compensation and costs which
principally relate to office space, including interest charges and
depreciation. 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.

In the opinion of management, the results of operations of the Company
reflect all of the Company's costs, including salaries, rent,
depreciation, legal and accounting services and other general and
administrative costs.

F-11
<PAGE> 47

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 1 (CONTINUED)

i. Concentration and Fair Value of Financial Instruments

The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The Company places its cash and temporary cash
investments with high credit quality institutions. In general, such
balances generally exceed the FDIC insurance limit. Management of the
Company provides credit, in the normal course of business, to a
significant number of advertisers in the tobacco, alcohol and adult
entertainment industries. The Company routinely assesses the financial
strength of its customers and newsstand distributors and, as a
consequence, believes that its trade accounts receivable exposure is
limited. The carrying value of financial instruments potentially
subject to valuation risk (principally consisting of cash and cash
equivalents) approximates fair market value. Based upon the quoted
market prices, the fair value of the Company's Senior Secured Notes was
$70,400,000 and $44,200,000 as of December 31, 1998 and 1999,
respectively.

j. Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

k. Reclassification of Prior Periods

Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation.

NOTE 2 - BASIS OF PRESENTATION

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has sustained net
losses (before Gain on Sale of Automotive Magazines) from operations

F-12
<PAGE> 48

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 2 (CONTINUED)

in recent years, and in 1999, the Company has used, rather than provided,
cash in its operations. Further, at December 31, 1999, current liabilities
exceeded current assets by $59,685,000 and total liabilities exceeded total
assets by $56,703,000. The Company's Senior Secured Notes (the "Notes")
totaling $52,000,000 (see Note 6) mature on December 31, 2000. Management
of the Company does not believe that it can generate sufficient funds from
operations in time to repay the Notes upon maturity and there can be no
assurance that the Company will be able to secure a source of funding for
the refinancing of 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.

In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheets is dependent upon the Company's ability to obtain financing
and continued operations of the Company. The financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.

The Company has undertaken several actions to achieve future profitability
and improve cash flow. There can be no assurance that management will be
able to achieve such plans. These actions are as follows:

- Improve revenue by increasing the cover price of certain of
its publications.

- Decrease production costs of its magazines by reducing the
number of newsstand copies it prints (through increased
newsstand sales efficiencies and overall print order
reductions), changing the paper grades on substantially all
its publications, reducing the number of pages per issue of
certain publications, and discontinuing an unprofitable
publication.

- Decrease selling, general and administrative expenses by
reducing the number of employees, professional fees,
advertising costs and other selling, general and
administrative expenses as a result of restructuring the
Company's operations.

In addition, the Company is actively seeking to secure a source of funding
for the refinancing of its notes.

F-13
<PAGE> 49

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 3 - SALE OF AUTOMOTIVE MAGAZINES

On March 2, 1999 (the "Closing Date"), the Company sold substantially all
of the assets, exclusive of net newsstand and advertising accounts
receivable, of its wholly-owned subsidiary, General Media Automotive Group,
Inc. ("GMAG"), to EMAP Petersen, Inc. ("EMAP") for $35,000,000 in cash plus
the assumption of certain liabilities and deferred subscription
liabilities, as defined in the Asset Sale and Purchase Agreement between
EMAP and GMAG dated as of February 9, 1999 (the "Asset Purchase
Agreement"). There are no material relationships between EMAP and the
Company or any of its affiliates, any director or officer of the Company,
or any associate of any such director or officer. The sale price is subject
to an adjustment which was to be finalized within 60 days from the Closing
Date and shall be increased or decreased on a dollar-for-dollar basis by
the amount that net working capital, as defined in the Asset Purchase
Agreement, deviates from $1,500,000. The Company recorded an after-tax gain
of approximately $27,000,000 on the sale. A final determination with
respect to the sale price adjustment has not yet been made, although the
Company does not expect such adjustment to be material.

Under the Indenture, as discussed in Note 6, the Company had 180 days from
the Closing Date to apply the net proceeds to an investment in another
business or capital expenditure or other tangible or long-term assets in
the same or similar line of business as the Company was engaged in on the
date of the Indenture. To the extent that any net proceeds were not so
applied, the remaining amount was to be deemed excess proceeds. Should the
excess proceeds exceed $5,000,000, the Company was required to make an
offer to all bondholders to purchase the maximum principal amount of notes
plus accrued interest that may be purchased from the excess proceeds.

On April 27, 1999, the Company tendered an Offer To Purchase and Consent
Solicitation Agreement (the "Offer") to the registered holders (the
"Noteholders") of the Notes. The Offer solicited consents from Noteholders
for the adoption of certain proposed waivers and amendments to the
Indenture, and solicited the Noteholders consent to the Company's offer to
purchase for cash, on a pro rata basis, $28,000,000 in aggregate principal
amount of the Notes from the proceeds received from the sale of the
Automotive Magazines (the "Sales Proceeds"). The purchase price offered was
$0.95 for each $1.00 in principal amount of Notes tendered and accepted
pursuant to the Offer, plus accrued interest through and including the date
of purchase. The Offer further requested the Noteholders to consent to the
release to the Company for general working capital of approximately
$2,700,000 remaining from the Sales Proceeds, after giving effect to the
purchase of the Notes contemplated in the Offer and costs associated with
the sale of the Automotive Magazines. In May 1999, a majority of the
Noteholders consented to the waivers and amendments to the Indenture and
tendered the full $28,000,000 in principal amount of Notes for purchase by
the Company for cash of $26,600,000. The remaining cash of approximately
$2,700,000 was released to the Company for general working capital
purposes.

F-14
<PAGE> 50

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 3 (CONTINUED)

The effect of this Offer was a reduction in Notes outstanding of
$28,000,000, a reduction in interest expense in Fiscal 1999 of
approximately $1,800,000, a net gain of $671,000 on the retirement of the
Notes and a reduction in available cash of approximately $28,000,000. The
net gain of $671,000 has been reflected in the consolidated statements of
operations as an extraordinary item.

NOTE 4 - INVENTORIES

Inventories include the following at December 31,:

<TABLE>
<CAPTION>
1998 1999
------ ------
(in thousands)
<S> <C> <C>
Paper and printing $1,807 $1,702
Editorials and pictorials 2,080 2,295
Film and programming costs 771 526
------ ------

$4,658 $4,523
===== =====
</TABLE>

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment as of December 31, consist of:

1998 1999
------ ------
(in thousands)

<S> <C> <C>
Furniture and equipment $ 6,613 $ 6,364
Leasehold improvements 1,847 1,985
Computer hardware and software 2,549 2,541
Other 66 66
--------- ---------

11,075 10,956

Accumulated depreciation and amortization (7,332) (7,584)
------- -------

$ 3,743 $ 3,372
======= =======
</TABLE>

Depreciation and amortization expense was $1,257,000, $1,198,000 and
$838,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.

F-15
<PAGE> 51

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 6 - 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. The Notes can
be redeemed at the option of the Company during the period beginning on
December 31, 1998 at 104% of the principal amount of the Notes and
beginning December 31, 1999 and thereafter at 100% of the principal amount
of the Notes.

The Company also issued 85,000 common stock purchase warrants to the
purchasers of the Notes and sold to the underwriter at a discount 102,506
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
of 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 a total
cash price of $4,050,000. As more fully described in Note 3, 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 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.

F-16
<PAGE> 52

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 6 (CONTINUED)

The indenture under the Notes (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 December 31, 1999, 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 on March 27,
2000 by a transfer of the outstanding stock of a subsidiary of GMI whose
net assets have an appraised value of $1,800,000 consisting of works of art
and other valuables. The remaining balance of $795,000 was applied against
the outstanding receivable from GMI.

NOTE 7 - INCOME TAXES

The income tax provision for the year ended December 31 consists of:

<TABLE>
<CAPTION>
1999
-------
(in thousands)
<S> <C>
Current
Federal $1,519
State 1,871
------
$3,390
The provision for income taxes differs from the amount of income tax ======
determined by applying the applicable U.S. statutory rate to earnings
before income taxes, as a result of the following:

1999
-------
Statutory Federal income tax rate 34.0%
Net operating loss carryforwards (31.8)
State taxes, net of Federal income tax 5.6
Timing differences 7.2
------

Effective tax rate 15.0%
====
</TABLE>

F-17
<PAGE> 53

General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 7 (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the deferred income tax assets and liabilities at
December 31, were as follows:

<TABLE>
<CAPTION>
1998 1999
--------(in thousands)---------
<S> <C> <C>
Deferred tax assets
Reserve for doubtful accounts $ 274 $ 449
Accrued severance -- 280
Federal alternative minimum tax ("AMT") credit
carryforward -- 275
Contributions carryforwards 99 105
State alternative minimum tax ("AMT") credit
carryforward -- 250
Loss carryforwards 48,332 32,857
-------- --------

Gross deferred tax asset 48,705 34,216

Deferred tax liabilities
Depreciation (62) (564)
LIFO basis difference (143) (71)
-------- --------

Gross deferred tax liability (205) (635)
-------- --------

Valuation allowance (48,500) (33,581)
-------- --------

Net deferred tax asset $ -- $ --
======== ========
</TABLE>

F-18
<PAGE> 54
General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 7 (CONTINUED)

The Company has established a full valuation allowance with respect to the
future realization of net operating loss carryforwards, tax credits and
other tax assets due to the uncertainty of the Company's ability to
generate sufficient future taxable income.

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 Company will not be required to remit
income taxes to GMI to the extent that taxes are not payable, due to the
utilization of available net operating loss carryovers. GMI has available
for Federal income tax purposes net operating losses aggregating
approximately $82,142,000 which can be used by the Company to reduce future
income taxes, as long as the Company is a member of GMI's consolidated
group, which will expire in tax years ending in 2005 to 2019. The Company's
ability to utilize net operating losses may be limited in the future due to
additional issuances of the Company's common stock or other changes in
control, as defined in the Internal Revenue Code and related regulations.
In addition, utilization of NOL carryforwards may be limited by the
application of the at-risk rules. The amount of taxes that the Company
would have paid in 1999 had GMI's net operating losses not been made
available to the Company was $1,480,000 and that amount has been recorded
as a contribution to capital by the Company in the accompanying financial
statements.

The Internal Revenue Service has completed an audit of GMI's Federal income
tax returns for the years ended 1986 through 1990. This audit resulted in a
tax deficiency totaling $35,000 plus interest, which was paid in October
1999. As a result of the audit, the net operating loss carryforward was
reduced by $95,600. Subsequent years' income tax and other tax returns
filed by GMI are being audited or are subject to audit by governmental
authorities.

F-19
<PAGE> 55
General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Litigation

In August 1996, an action was brought against the Company alleging various
wrongs in connection with the Company's dealings with the former editor of
Penthouse Comix and Mens Adventure Comix. By decision dated December 2,
1998, United States District Court dismissed the plaintiffs' Federal claims
with prejudice and the plaintiffs' State claims without prejudice. The
plaintiffs have indicated their intention to file a similar claim in New
York State Courts; however, no such claim has yet been filed. In the
opinion of management, the outcome of this claim is not reasonably likely
to have a material adverse effect on the Company's financial position or
results of operations.

On January 23, 1997, the Company filed in the 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
$30,000,000 in addition to incidental, consequential and punitive damages
and compensation for lost profits. The Company intends to vigorously defend
the arbitration, which is scheduled for June 2000. 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.

F-20
<PAGE> 56
General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 8 (CONTINUED)

Leases

The Company leases office space in several cities under operating leases
expiring at various dates through March 2009. Rent expense under operating
leases was $2,440,000, $2,396,000 and $1,956,000 during the years ended
December 31, 1997, 1998 and 1999, respectively. Minimum lease commitments
are set forth below:

<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
<S> <C>
2000 $ 1,810
2001 1,736
2002 1,868
2003 1,863
2004 1,864
Thereafter 8,063
-------

$17,204
=======
</TABLE>

Employee Benefit Plan

The Company's employees may participate in a GMI-sponsored employee
profit-sharing and deferred compensation 401(k) benefit plan. The plan
covers substantially all employees and permits employees to defer up to 15%
of their salary. The plan also provides for GMI and the Company to make
contributions to a profit-sharing fund solely at GMI's or the Company's
discretion. There were no Company contributions to the plan for the years
ended December 31, 1997, 1998 and 1999.

NOTE 9 - UNEARNED REVENUE

During 1994 and 1995, the Company received amounts aggregating $1,000,000
and $8,000,000, respectively, relating to three distribution agreements for
the Company's products. The advance in 1994 of $1,000,000 represents an
incentive to sign a ten-year agreement with a distributor covering the
foreign distribution of the Company's magazines. One of the advances in
1995 of $5,000,000 represents an advance payment for sales of the Company's
video products, which is being recognized as revenue as Company products
are sold through a distributor. The other advance, totaling $3,000,000,
represents an incentive to sign a ten-year agreement with the distributor
covering domestic distribution of the Company's magazines. Incentive
advances are being recognized as revenue on a straight-line basis over the
term of the related contract.

F-21
<PAGE> 57
General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 10 - RELATED PARTIES

Included in the accompanying statements of operations are allocated
expenses for the use by the Company of facilities owned by affiliated
companies. Rent expense from affiliated companies was $548,000, $523,000
and $542,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.

On November 26, 1993, the Company entered into a Property and Salary
Allocation Agreement (the "Agreement") with GMI and a subsidiary of GMI
which allows the Company to be charged for the cost of utilizing facilities
owned by GMI and a subsidiary of GMI. The charges are based upon an
estimate of the portion of the executive offices used by the Company and
the cost of utilizing comparable facilities as determined by the
nonemployee members of the Board of Directors of the Company.

The Agreement also allows for the Company to be charged for salaries of the
Chairman of the Board and the previous Vice Chairman of the Board of the
Company, which are paid by GMI. The amount of salary charged to the Company
is based upon an estimate of the time devoted to Company matters.

On November 26, 1993, the Company entered into an Expense Allocation
Agreement with GMI and its subsidiaries which allows the Company to pay
certain shared common indirect expenses. GMI and its subsidiaries are
required to reimburse the Company, within 60 days after each quarter-end,
for any payments made by the Company on its behalf. The amount of shared
common indirect expenses charged to GMI and its subsidiaries is based upon
factors determined by management of the Company to be appropriate for the
particular item, including relative time commitments, relative number of
employees and square footage of space occupied. The amount receivable under
the Property and Salary Allocation Agreement and the Expense Allocation
Agreement at December 31, 1998 and 1999 was $2,143,000 and $2,996,000,
respectively. The principal shareholder of GMI has guaranteed the repayment
of these amounts. As discussed more fully in Note 6, on March 27, 2000, the
Company received a payment of approximately $795,000 toward this balance
through the transfer of the outstanding stock of a subsidiary of GMI.

The Company has an unsecured loan receivable from an entity which is owned
by GMI's principal shareholder. The loan amounted to $1,086,000 at December
31, 1998 and 1999. The loan is due on demand, bears no interest and is
guaranteed by GMI's principal shareholder.

In October 1997, GMI's principal shareholder was granted a loan in the
amount of $1,200,000 from a company that had simultaneously entered into an
agreement with the Company to provide services for the Company's
pay-per-call business. The loan was in consideration of GMI's principal
shareholder personally guaranteeing all material obligations of the Company
under the agreement. The loan is payable in full, with interest at 9% per
annum, no earlier than December 31, 2001. If the note is repaid in full
prior to June 30, 2001, the unpaid principal amount of the loan is reduced
by $500,000.

F-22
<PAGE> 58
General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 10 (CONTINUED)

The Company had $985,000 and $862,000 of loans receivable as of December
31, 1998 and 1999, respectively, from GMI's principal shareholder, pursuant
to a promissory note. Such loan bears interest at 11% per annum and is due
on December 31, 2000.

NOTE 11 - SEGMENT INFORMATION

<TABLE>
<CAPTION>
Corporate and
Entertain- reconciling
Publishing ment items Consolidated
----------------------------(in thousands)----------------------------
<S> <C> <C> <C>
1999
SALES TO CUSTOMERS $62,213 $16,598 $ 78,811
INCOME (LOSS) FROM OPERATIONS 5,594 8,389 $(14,827) (844)
IDENTIFIABLE ASSETS 17,059 1,452 11,793 30,304
DEPRECIATION AND AMORTIZATION 664 277 941
CAPITAL EXPENDITURES 610 28 638

1998
Sales to customers $87,503 $17,647 $105,150
Income from operations 13,754 9,743 $(17,975) 5,522
Identifiable assets 27,482 1,352 13,114 41,948
Depreciation and amortization 1,533 282 1,815
Capital expenditures 2,570 182 2,752

1997
Sales to customers $86,918 $16,842 $103,760
Income from operations 15,762 6,648 $(15,018) 7,392
Identifiable assets 27,336 2,029 13,262 42,627
Depreciation and amortization 1,604 269 1,873
Capital expenditures 260 75 335
</TABLE>

F-23
<PAGE> 59
General Media, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

December 31, 1998 and 1999

NOTE 11 (CONTINUED)

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.

The market for the Company's product is worldwide; however, over 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 revenues in 1997, 1998 or 1999, and no part of the business
is dependent upon a single customer or a few customers, the loss of any one
or more of which would have a material adverse effect on the Company.

F-24
<PAGE> 60
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE

Board of Directors
GENERAL MEDIA, INC. AND SUBSIDIARIES

In connection with our audits of the consolidated financial statements of
General Media, Inc. and Subsidiaries, referred to in our report dated March 3,
2000 (except for Note 6, as to which the date is March 27, 2000), we have also
audited Schedule II as of December 31, 1997, 1998 and 1999, and for each of the
three years in the period ended December 31, 1999. In our opinion, this schedule
presents fairly, in all material respects, the information set forth therein.
Our report on the financial statements referred to above includes an explanatory
paragraph which discusses the uncertainty about the Company's ability to
continue as a going concern.

/s/ GRANT THORNTON LLP
GRANT THORNTON LLP

New York, New York
March 3, 2000

S-1
<PAGE> 61
General Media, Inc. and Subsidiaries

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Years ended December 31, 1999, 1998 and 1997
(amounts in thousands)

Column A Column B Column C Column D Column E
-------- --------- -------- ----------- ---------
Additions
------------------------------
Charged to
Balance at Charged to Other Balance at
beginning costs and accounts - Deductions - end of
Description of period expenses Describe describe period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 918 $ 724 $ 520 (a) $1,122
======= ======= ======= ======

Year ended December 31, 1998
Allowance for doubtful accounts $ 951 $2,961 $2,994 (a) $ 918
======= ====== ====== =======

Year ended December 31, 1997
Allowance for doubtful accounts $1,661 $ 555 $1,265 (a) $ 951
====== ======= ====== =======
</TABLE>

(a) Accounts written off, net of recoveries.

S-2
<PAGE> 62

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

By: /s/ Robert C. Guccione March 30, 2000
----------------------------------------
Robert C. Guccione,
Chairman of the Board;
Publisher
(Principal Executive Officer)

By: /s/ John D. Orlando March 30, 2000
----------------------------------------
John D. Orlando,
Senior Vice President-
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Guccione Chairman of the Board, March 30, 2000
- -------------------------- Publisher and Director
Robert C. Guccione

/s/ Nina Guccione President-New Media, Secretary March 30, 2000
- -------------------------- and Director
Nina Guccione

/s/ John D. Orlando Senior Vice President- Chief Financial March 30, 2000
- -------------------------- Officer and Director
John D. Orlando

/s/ William F. Marlieb Director March 30, 2000
- ---------------------------
William F. Marlieb

/s/ John L. Decker Director March 30, 2000
- ---------------------------
John L. Decker

/s/ Phyllis Schwebel Director March 30, 2000
- ---------------------------
Phyllis Schwebel
</TABLE>
<PAGE> 63
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Numbering
------- ----------- ---------
<S> <C> <C>
*3.1 -- Certificate of Incorporation of the Company, filed
with the Secretary of State of Delaware on November

9, 1993.
*3.2 -- By-Laws of the Company.

*4.1 -- Indenture, dated as of December 21, 1993, between
the Company and IBJ Schroder Bank & Trust
Company, as trustee ("Trustee"), containing, as
exhibits, specimens of Series A Notes and Series B
Notes.

*4.2 -- Registration Rights Agreement, dated as of
December 21, 1993, between the Company and the
Underwriters.

*4.3 -- Security Agreement, dated December 21, 1993,
between the Company and Trustee.

*4.4 -- Pledge Agreement, dated December 21, 1993,
between the Company and Trustee.

*4.5 -- Copyright Security Agreement, dated December 21,
1993, between the Company and Trustee.

*4.6 -- Trademark Security Agreement, dated December 21,
1993, between the Company and Trustee.

+*10.1 -- Distribution Agreement, dated September 19, 1977,
among Curtis Circulation, Penthouse International,
Ltd., Forum International, Ltd., Viva International,
Ltd., Penthouse Photo World, Ltd. and Penthouse
Poster Press, Ltd.; Amendment No. 1, undated;
Amendment No. 2, dated September 8, 1982;
Amendment No. 3, dated March 18, 1985; and
Amendment No. 4, dated February 1, 1986.

+*10.2 -- Printing Agreement, dated April 30, 1980, between
Penthouse International, Ltd. and Meredith
Corporation (to print Penthouse); Amendment, dated
October 23, 1986; Addendum #8, dated November 7,
1986; Amendment, dated December 8, 1986;
Addendum, dated March 20, 1987; Amendment,
dated November 3, 1987; Addendum, dated March
15, 1990; Addendum, dated June 15, 1990; and
Amendment and Extension, dated September 1,
1992.

+*10.3 -- Printing Agreement, dated May 13, 1987, between
Penthouse International, Ltd. and Meredith/Burda (to
print Girls of Penthouse); Addendum, dated March
15, 1990; Addendum, dated June 15, 1990; and
Amendment and Extension, dated September 1,
1992.
</TABLE>

i
<PAGE> 64
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Numbering
------- ----------- ---------
<S> <C> <C>
+*10.4 -- Printing Agreement, dated July 20, 1993, among Hot
Talk Publications, Ltd., Penthouse Letters, Ltd.,
General Media International, Inc. and R.R. Donnelley
& Sons Co. (to print Hot Talk and Penthouse
Letters).

*10.5 -- Warrant Agreement, dated December 21, 1993,
between the Company and Trustee.

*10.6 -- Properties and Salary Allocation Agreement, dated
December 21, 1993, among the Company, GMI and
Locusts on the Hudson River Corp.

*10.7 -- Expense Allocation Agreement, dated December 21,
1993, between the Company, GMI and the Other
GMI Subsidiaries.

*10.8 -- Tax Sharing and Indemnification Agreement, dated
December 21, 1993, among the Company, GMI and
the Other GMI Subsidiaries.

+10.9 -- Circulation Subscription Fulfillment Services
Agreement, dated September 15, 1994, between
Palm Coast Data, Ltd., Penthouse International, Ltd.,
Omni Publications International, Ltd., Longevity
International, Ltd., Four Wheeler Publishing, Ltd.,
Stock Car Racing Publications, Inc., Open Wheel
Publications, Inc., Super Stock Publications, Inc.,
Forum International, Ltd. and Variations Publishing
International, Ltd.; Amendment, dated September 16,
1994 (incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).

10.10 -- Employment Agreement, dated December 17, 1997,
between the Company and Robert H.
Altman.**(incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1997).

10.11 -- Retirement Agreement, effective April 4, 1997,
between the Company and William F.
Marlieb.**(incorporated by reference to Exhibit
10.16 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1997).
</TABLE>

ii
<PAGE> 65
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Numbering
------- ----------- ---------
<S> <C> <C>

+10.12 -- Amendment and Extension by and among R.R.
Donnelly & Sons and General Media International,
Inc., General Media, Inc., General Media
Communications, Inc. And General Media
Automotive Group, Inc. (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1997).

+10.13 -- Printing Contract between Access Printing and
General Media Communications, Inc.
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998).

10.14 -- Agreement of Lease between M393 Associates
LLC and General Media, Inc. (incorporated by
reference to Exhibit 10.2 to
the Company's Quarterly Report
on Form 10-Q for the quarter
ended September 30, 1998).

10.15 -- Asset Sale and Purchase Agreement between
EMAP Petersen, Inc. and General Media
Automotive Group, Inc.dated as of February
9,1999 (incorporated by reference to Exhibit
10.21 to the Company's Current Report on Form
8-K dated March 2, 1999).

12.1 -- Computation of ratio of earnings to fixed charges.

21.1 -- Subsidiaries of the Company.

27 -- Financial Data Schedule
</TABLE>

- ---------------------

* Previously filed with Registration Statement No. 33-76176 on Form S-4,
and incorporated herein by reference to such Registration Statement.

** Compensatory arrangement.

+ Confidential treatment has been granted with respect to certain
information contained in this exhibit.

iii

<PAGE> 1
Exhibit 12.1
General Media, Inc.
Computation of Ratio of Earning to Fixed Charges
Year Ended December 31,

<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations,
before income taxes ($10,012,000) ($ 701,000) ($ 1,915,000) ($ 3,879,000) $ 22,606,000
------------ ------------ ------------ ------------ ------------

Adjustments to income (loss)
Interest expense 10,302,000 9,907,000 9,918,000 9,918,000 7,969,000
Interest income (541,000) (319,000) (611,000) (517,000) (762,000)
Interest expense in rental charges 689,000 789,000 754,000 757,000 615,000
------------ ------------ ------------ ------------ ------------

Adjusted income (loss) $ 438,000 $ 9,676,000 $ 8,146,000 $ 6,279,000 $ 30,428,000
============ ============ ============ ============ ============

Fixed charges
Interest expense $ 10,302,000 $ 9,907,000 $ 9,918,000 $ 9,918,000 $ 7,969,000
Interest expense in rental charges 689,000 789,000 754,000 757,000 615,000
------------ ------------ ------------ ------------ ------------

Total fixed charges $ 10,991,000 $ 10,696,000 $ 10,672,000 $ 10,675,000 $ 8,584,000
============ ============ ============ ============ ============

Ratio of earnings to fixed charges 0.0 0.9 0.8 0.6 3.5
============ ============ ============ ============ ============
</TABLE>

<PAGE> 1
Exhibit 21.1

LIST OF SUBSIDIARIES OF GENERAL MEDIA, INC.

<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Incorporation
Name Or Organization
---- ---------------
<S> <C>
1. General Media Communications, Inc. Delaware
2. General Media Films, Inc. New York
3. General Media International Financial Services (GMIFS)
N.V. Netherlands Antilles
4. General Media (UK), Ltd. United Kingdom
5. Penthouse Clubs International Establishment Liechtenstein
6. Penthouse Images Acquisition, Ltd. New York
7. Penthouse Music, Ltd. Delaware
8. Pure Entertainment Telecommunications, Inc. New York
9. Pure Entertainment Telecommunications (Curacao) N.V. Netherland Antilles
10. General Media Entertainment, Inc. New York
11. General Media Automotive Group, Inc. New York
12. GMI Worldwide On-Line Services, Inc. Delaware
13. Penthouse Financial Services N.V. Netherland Antilles
14. General Media Art Holding, Inc. Delaware
15. GMCI Internet Operations, Inc. (*) New York
16. GMI On-Line Ventures, Ltd. (*) Delaware
</TABLE>

(*) Formed January 13, 2000

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENERAL
MEDIA INC'S DECEMBER 31, 1999 FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,659
<SECURITIES> 0
<RECEIVABLES> 6,801
<ALLOWANCES> 0
<INVENTORY> 4,523
<CURRENT-ASSETS> 22,315
<PP&E> 3,372
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,304
<CURRENT-LIABILITIES> 82,000
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> (56,708)
<TOTAL-LIABILITY-AND-EQUITY> 30,304
<SALES> 78,811
<TOTAL-REVENUES> 78,811
<CGS> 36,943
<TOTAL-COSTS> 42,170
<OTHER-EXPENSES> 542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,969)
<INCOME-PRETAX> 22,606
<INCOME-TAX> (3,390)
<INCOME-CONTINUING> 19,216
<DISCONTINUED> 0
<EXTRAORDINARY> 671
<CHANGES> 0
<NET-INCOME> 19,887
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>