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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) of the Securities
Exchange Act of 1934
Commission
For the Quarterly Period Ended June 30, 2002 File No. 33-76716
General Media, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3750988
----------------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
11 Penn Plaza, New York, NY 10001
----------------------------------------- ----------------------
(Address of Principal Executive Zip Code
Offices)
(212) 702-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 14, 2002
----- ------------------------------
Common stock, $.01 par value 477,401
GENERAL MEDIA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
PART II-OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of
Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 38
2
ITEM 1. FINANCIAL STATEMENTS
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2002 2001 2002
-------- -------- -------- --------
NET REVENUES $ 33,198 $ 30,282 16,175 16,074
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Publishing-production, distribution and editorial 12,072 11,631 5,996 6,164
Entertainment- direct costs 511 442 249 205
Selling, general and administrative 12,914 12,410 6,577 5,788
Rent expense from affiliated companies 341 333 194 218
Bad debt expense 845 78 39 44
Depreciation and amortization 304 273 150 131
-------- -------- -------- --------
Total operating costs and expenses 26,987 25,167 13,205 12,550
-------- -------- -------- --------
Income from operations 6,211 5,115 2,970 3,524
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (4,093) (3,791) (2,024) (1,849)
Gain on sale of officer's life insurance policies (Note 8) 811 811
Interest income 172 61 69 23
Debt restructuring expenses (Note 6) (9,524) (71)
-------- -------- -------- --------
Total other income (expense), net (13,445) (2,919) (2,026) (1,015)
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (7,234) 2,196 944 2,509
Provision for income taxes 376 13 (135) 7
-------- -------- -------- --------
Net income (loss) (7,610) 2,183 1,079 2,502
Accumulated deficit-beginning of period (55,807) (65,715) (64,496) (66,034)
-------- -------- -------- --------
Accumulated deficit-end of period ($63,417) ($63,532) ($63,417) ($63,532)
======== ======== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31, JUNE 30,
2001 2002
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,431 $ 485
Accounts receivable, net of allowance
for doubtful accounts 3,340 3,167
Inventories 4,447 2,854
Prepaid expenses and other current assets 1,855 1,104
-------- --------
TOTAL CURRENT ASSETS 12,073 7,610
WORKS OF ART AND OTHER COLLECTABLES 2,270 2,270
PROPERTY AND EQUIPMENT - AT COST;
net of accumulated depreciation and amortization 2,420 2,147
OTHER ASSETS
Due from affiliated companies 3,805 4,695
Rent security deposits 1,496 1,111
Loan to shareholder 1,000
Deferred subscription aquisition costs, net 1,282 499
Other 1,440 1,023
-------- --------
9,023 7,328
-------- --------
$ 25,786 $ 19,355
======== ========
LIABILITIES AND STOCKHOLDER DEFICIENCY
CURRENT LIABILITIES
Current maturities of Senior Secured Notes $ 5,800 $ 7,800
Accounts payable 12,439 7,105
Accrued retail display allowance 1,407 1,747
Deferred revenue 9,551 8,105
Accrued Interest - Senior Secured Notes 1,840 1,757
Other liabilities and accrued expenses 2,442 2,897
Income tax payable 925 920
-------- --------
TOTAL CURRENT LIABILITIES 34,404 30,331
SENIOR SECURED NOTES, LESS CURRENT MATURITIES 43,257 39,072
UNEARNED REVENUE 1,433 1,205
OTHER NON-CURRENT LIABILITIES 1,130 1,002
CONTINGENCIES
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK 9,450 10,328
STOCKHOLDER DEFICIENCY
Common stock, $.01 par value; 1,000,000
shares; issued and outstanding, 477,401 shares 5 5
Capital in excess of par value 1,822 944
Accumulated deficit (65,715) (63,532)
-------- --------
(63,888) (62,583)
-------- --------
$ 25,786 $ 19,355
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GENERAL MEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($7,610) $ 2,183
Adjustments to reconcile net loss to
cash provided by (used in) operating activities:
Depreciation and amortization 304 273
Amortization of unearned revenue (182) (228)
Gain on sale of officer's life insurance policies (811)
Debt restructuring cost 9,524
Interest on loan to shareholder (55)
Income taxes reimbursable to affiliated companies 376
Change in operating assets and liabilities:
Accounts receivable 2,788 173
Inventories 865 1,593
Other current assets 561 751
Other assets (307) 1,461
Accounts payable, accrued expenses and other
current liabilities (590) (4,539)
Accrued interest on Senior Secured Notes (856) (83)
Income taxes payable (25) (5)
Deferred revenue (561) (1,446)
Other long term liabilities (43) (128)
------- -------
Net cash provided by (used in) operations 4,189 (806)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of officers life insurance policies 935
Capital expenditures (100)
------- -------
Net cash provided by (used in) investing activities (100) 935
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to affiliated companies (2,537) (890)
Debt issuance costs (1,905)
Repayment of Senior Secured Notes (1,193) (2,185)
Repayment of shareholder loan 1,000
------- -------
Net cash used in financing activities (5,635) (2,075)
------- -------
Net decrease in cash and cash equivalents (1,546) (1,946)
Cash and cash equivalents at beginning of period 6,425 2,431
------- -------
Cash and cash equivalents at end of period $ 4,879 $ 485
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,924 $ 3,842
Income taxes $ 25 $ 11
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Noncash issuance of mandatorily redeemable convertible
preferred stock $ 8,200
Noncash expiration of redeemable common stock warrants $ 582
Noncash "paid in kind" dividends on mandatorily redeemable
preferred stock $ 339 $ 709
Noncash accretion of mandatorily redeemable preferred
stock to liquidation preference $ 82 $ 169
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION AND LIQUIDITY
General Media International, Inc. ("GMI") is the holder of 99.5% of the common
stock of General Media, Inc. (the "Company"). On March 29, 2001 the Company
issued 9,905 shares of mandatorily redeemable convertible preferred stock to
third parties (See Note 7). The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. The results of operations for the three months
and six months ended June 30, 2002 are not necessarily indicative of results
that may be expected for any other interim period or for the full year. The
balance sheet information for December 31, 2001 has been derived from the
audited financial statements at that date.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. At June 30, 2002,
the Company's cash balance was $485,000 as compared to $2,431,000 at December
31, 2001, for a decrease of $1,946,000 during the six month period ended June
30, 2002. This decrease was due to the use of $806,000 in operating activities,
the net increase in advances to affiliated companies of $890,000 and mandatory
principal payments for its Series C Notes of $2,185,000. This was offset in part
by the receipt of $935,000 from the sale of officer's life insurance policies on
the life of the principal shareholder and the collection of $1,000,000 of loans
receivable from the principal shareholder that arose in prior periods.
Subsequent to June 30, 2002, the Company collected $2,560,000 on the balance due
from affiliated companies. This amount and approximately $525,000 of cash from
operations generated in 2002 was used during July 2002 to pay principal and
interest payments totaling $3,085,000 on the Series C Notes. At June 30, 2002,
the Company's current liabilities exceeded current assets by $22,721,000.
In addition to the principal and interest payments made in July 2002, the
Company's Series C Notes require interest payments of approximately $6,443,000
and amortization payments of $6,500,000 during the period August 1, 2002 to June
30, 2003. The management of the Company does not believe it can generate
sufficient funds from operations to make all of these required payments. In the
event that the Company is unable to make these payments, the trustee under the
Indenture could assume control over the Company and substantially all of its
assets including its registered trademarks. The Company is seeking other sources
of financing to replace its current debt arrangements. There can be no assurance
that the Company will be successful in locating other sources of financing.
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 continue
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.
6
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
1. (CONTINUED)
The Company has undertaken the following actions to attempt to achieve
profitability and improve cash flow:
o On February 28, 2002, the Company reduced its workforce by 39 employees
(26% of total workforce). This action will reduce the amount of cash
required for salary and benefit expenses.
o Reduced the production costs of its magazines by negotiating reductions in
the price of paper and printing costs, by changing the paper grades on its
magazines and by changing their design to improve production efficiencies.
o Reduced the amount of cash expended to promote subscriptions and reduced
the amount of cash expended on other selling, general and administrative
expenses.
o Improved revenue by adding additional special issues of its magazines.
o Delayed employee salary increases for five months during 2002.
o The principal shareholder, Robert C. Guccione, repaid a $1,000,000 loan
that arose in prior periods.
o In the month of July 2002, GMI repaid $2,560,000 of intercompany advances.
Since the above actions will not generate sufficient improvements to cash flow
to meet current debt service requirements, the Company is contemplating
additional actions, including seeking other sources of financing, to provide
cash. However, there can be no assurances that management will be able to
achieve such a result.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 2001 included in
the Company's Annual Report on Form 10-K. The accounting policies used in
preparing these financial statements are the same as those described in the
financial statements and notes thereto for the year ended December 31, 2001.
2. ACCOUNTING FOR RETAIL DISPLAY ALLOWANCES
Certain provisions of The Emerging Issues Task Force pronouncement EITF 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)", are effective for fiscal periods beginning
after December 15, 2001. The Task Force reached a consensus that consideration
from a vendor to a reseller of the vendor's products is presumed to be a
reduction of the selling prices of the vendor's products and, therefore, should
be characterized as a reduction of revenue when recognized in the vendor's
income statement. Beginning January 2002 the Company adopted this policy as it
relates to retail display allowances. Retail display allowances had been
included in selling, general and administrative expenses prior to the adoption
of this policy. The effect on the Company of the adoption of the policy is a
7
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
2. (CONTINUED)
reduction of newsstand revenue and an equivalent reduction in selling, general
and administrative expenses of $1,528,000 and $1,294,000 for the six months
ended June 30, 2002 and 2001, respectively. As a result of this adjustment, the
net revenue and the selling, general and administrative expenses of the
publishing segment for the six months ended June 30, 2001 have each been reduced
by approximately $1,294,000 to conform to the June 31, 2002 presentation.
3. INVENTORIES
Inventories consist of the following:
December 31, June 30,
2001 2002
------------ --------
-- In Thousands --
Paper and printing $1,411 $ 505
Editorials and pictorial 2,239 1,852
Film and programming costs 797 497
------ ------
$4,447 $2,854
====== ======
4. MANAGEMENT CHARGE
The Company incurs shared common indirect expenses for the benefit of GMI and
affiliated companies, including accounting, personnel, management information
systems, employee relations and other administrative services. In addition, the
Company is charged by GMI and its subsidiaries for the benefit of other
corporate overhead costs, executive compensation and other costs, which
principally relate to office space. These allocations are based on factors
determined by management of the Company and GMI to be appropriate for the
particular item, including estimated relative time commitments of managerial
personnel, relative number of employees and relative square footage of all space
occupied. Management believes that the allocation method and amounts are
reasonable.
5. SENIOR SECURED NOTES
On December 21, 1993, the Company issued, pursuant to an indenture (the
"Indenture"), $85,000,000 of Senior Secured Notes (the "Notes") at an issue
price equal to 99.387% of the principal amount of the Notes. As part of the
issuance of the Notes, the Company 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, having an expiration date of
December 22, 2000, entitled 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 also gave the holders 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 their fair value.
8
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
5. (CONTINUED)
The Notes were collateralized by a first priority security interest in all
intellectual property rights (including copyrights and trademarks) and
substantially all other intangible and tangible assets of the Company, other
than accounts receivable, inventory and cash equivalents.
In July 1995, the Company repurchased $5,000,000 face amount of its outstanding
Notes, including 5,000 warrants, for cash of $4,050,000. In May 1999, the
Company repurchased $28,000,000 face amount of its outstanding Notes for cash of
$26,600,000. The remaining Notes matured on December 31, 2000 and bore interest
at 10-5/8% per annum, which was payable semiannually.
On December 22, 2000, 18,009 of the Warrants were converted into 2,401 shares of
the Company's Common Stock and 104,076 Warrants expired without being timely
exercised in accordance with the Warrant agreement. The due date of the
remaining 60,421 Warrants held by holders of the Notes was extended as part of
the negotiations for refinancing the Notes. The exercise of the 18,009 Warrants
was recorded in December 2000 as a reduction in redeemable warrants and a
contribution to capital of $173,000. The expiration of the 104,076 Warrants was
recorded in the financial statements in December 2000 as an extraordinary gain
from extinguishment of debt of $571,000, net of income tax of $465,000.
On March 29, 2001 (the "Closing Date"), the Company refinanced the Notes. Under
the refinancing agreement, the Company exchanged the $51,507,000 of principal
amount of Notes and any Warrants held by Noteholders (the "Consenting Holders")
for Series C Notes and mandatorily redeemable convertible preferred stock (the
"Preferred Stock") with a liquidation preference of $10,000,000 (See Note 7)
meeting certain specified terms and conditions. The remaining $493,000 principal
amount of Notes that were not exchanged were retired by payments made to the
holders on March 29, 2001.
The Series C Notes will mature on March 29, 2004, bear interest at a rate of
15% per annum from and after January 1, 2001 and require amortization payments
of $5,800,000 during the calendar year 2002 and $6,500,000 during the calendar
year 2003, with the balance due in 2004. In addition, further amortization
equal to 50% of excess cash flow in each year will be required, as well as any
proceeds from the sale of certain real property owned by GMI (after payment of
existing debt obligations thereon), and any proceeds to the Company from the
sale of certain insurance policies on the life of the principal shareholder
(the "Policies").The Company made amortization payments of $2,185,000 during
the first six months of 2002, which included $935,000 of proceeds from the sale
of certain of the Policies (See Note 8).
The Indenture has been extended to the March 29, 2004 maturity of the Series C
Notes. The original Indenture contained covenants, that continue to the new
maturity date, 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 consolidated tangible net
worth deficiency of no greater than $81,600,000, and (iii) restrict the
Company's ability to pay dividends unless certain financial performance tests
are met. The Company's subsidiaries, which are guarantors of the Senior Secured
Notes under the Indenture, however, were and continue to be permitted to pay
intercompany dividends on their shares of common stock. The ability of
9
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
5. (CONTINUED)
the Company and its subsidiaries to incur additional debt is severely limited
by such covenants. The Indenture was amended in conjunction with the issuance
of the Series C Notes to reflect the above mentioned payments, to reflect the
March 29, 2004 maturity of the Series C Notes, to provide additional "Change of
Control" events (requiring the commencement of an offer to purchase Notes), to
provide additional flexibility as to the nature of, but also to set a fixed
dollar limit for, "Owner Payments", and to require Noteholder consent to
entering into new lines of business or for sales or other conveyances of the
Penthouse trademark (other than ordinary course licensing) or other assets for
net proceeds in excess of $500,000. In addition, the related Security Agreement
was amended to grant additional security interests in inventory and accounts
receivable as well as a security interest in proceeds of the sale of certain
real property owned by GMI (after payment of existing debt obligations thereon)
and on any proceeds to the Company from the sale of Policies. As of June 30,
2002, the Company was in compliance with all such covenants. However as of June
30, 2002 the Company had not made a required principal redemption of
approximately $1,300,000 and a required interest payment of approximately
$1,757,000, both due by that date. During July 2002, the Company received
approximately $2,560,000 from amounts due the Company by affiliated companies.
These funds, along with $525,000 of cash from operations, were used by the
Company to make the required principal and interest payments within the
applicable grace periods allowed for by the Indenture.
In addition, the Indenture requires that the Company hire a replacement
President and Chief Operating Officer reasonably satisfactory to a majority of
the Holders (the "Holders") within ninety days of the date of either the
resignation or termination of John Prebich, the Company's former President and
Chief Operating Officer to avoid a deemed "Change of Control" which in turn
requires that an offer to purchase be made by the Company to all Holders. On
January 18, 2002, John Prebich was terminated. The Company proposed a
replacement President and Chief Operating Officer to the Holders within the
ninety day period. However the Holders rejected the proposed replacement on
April 25, 2002, after the ninety-day period. In May 2002, the Holders notified
the Company that they believed a "Change of Control" event had occurred due to
the failure of the Company to replace John Prebich within the ninety-day
period. The Company responded by stating that it did not believe a "Change of
Control" event had occurred because it had proposed a replacement for John
Prebich within the ninety-day period, which was rejected after the ninety-day
period. The Company also proposed that it's current Chief Financial Officer,
John Orlando, be accepted as the Company's President and Chief Operating
Officer. The Company and the Holders are entering into a Third Supplemental
Indenture dated as of August 1, 2002 to amend the "Change of Control" events in
the Indenture to add further restrictions on the amount of "Owner Payments", to
substitute John Orlando for John Prebich in the "Change of Control" provision
and to add new financial covenants that require the Company to achieve not less
than 80% of the projected revenues and EBITDA to be set forth in a business
plan that shall be delivered to the Holders no later then September 13, 2002.
In addition the Company agreed to allow the Holders to audit the books and
records of the Company and the payroll records of GMI and to pay all the legal
fees, costs and expenses, and audit fees of the Holders (collectively the
"Amendment Expenses") related to the agreement. The Company recorded $114,000
of Amendment Expenses during the six months ended June 30, 2002. In July 2002,
the Company also paid $100,000 to the Holders as a deposit against Amendment
Expenses expected to be incurred by the Holders in completing the amendment to
the Indenture. In exchange for these amendments the Holders agreed to waive
their complaint that a "Change of Control" had occurred.
10
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
6. DEBT RESTRUCTURING EXPENSES
In connection with the refinancing of the Company's debt, as more fully
described in Note 5 above, the Company recorded debt restructuring expenses
during the six months ended June 30, 2001 of $9,524,000, consisting of a fee of
approximately $1,030,000 to Consenting Holders as well as their legal fees and
expenses of approximately $143,000, legal fees and expenses for the Company's
own lawyers and representatives of approximately $733,000 and the fair market
value of 9,905 shares of Preferred Stock of $8,200,000 issued to the Consenting
Holders, as more fully described in Note 7 below, less the remaining $582,000 of
liability associated with 60,421 Warrants surrendered in connection with the
refinancing.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 29, 2001, the Company issued 9,905 shares of Preferred Stock to the
Consenting Holders with a fair market value of $8,200,000. The Preferred Stock
carries a liquidation preference of $10,000,000, provides for "paid-in-kind"
dividends at a 13% per annum rate and is convertible at the option of the
holders, after two years following the Closing Date, into 10% of the Company's
common stock on a fully diluted basis in the third year, 12.5% of the Company's
common stock on a fully diluted basis in the fourth year, and 15% of such common
stock on a fully diluted basis during the fifth year. The Preferred Stock is
mandatorily redeemable by the Company (subject to the aforementioned conversion
rights) at its liquidation preference including the "paid-in-kind" dividends at
the end of the fifth year.
The Preferred Stock may be optionally redeemed by the Company at a discount
during the first and second years following the Closing Date at redemption
prices of $4,000,000 if redeemed in the first six months, $6,000,000 thereafter
in the first year and $10,000,000 in the second year, and may be optionally
redeemed at increasing premiums of 110%, 115% and 120% during the third, fourth
and fifth years, respectively, provided that the Series C Notes are paid in full
at or before the time of any redemption.
The recorded value net of issuance costs are being accreted using the effective
interest method through the March 29, 2006 mandatory redemption date of the
Preferred Stock. The Company recorded $169,000 and $82,000 of such accretion for
the six months ended June 30, 2002 and 2001, respectively. The Company also
recorded "paid-in-kind" dividends of approximately $709,000 and $339,000 for the
six month ended June 30, 2002 and 2001, respectively. Both the accretion of the
Preferred Stock and the "paid-in-kind" dividends are reflected in the
accompanying financial statements as an increase in Mandatorily Redeemable
Convertible Preferred Stock and a decrease in Capital In Excess Of Par Value.
8. GAIN ON SALE OF OFFICER'S LIFE INSURANCE POLICIES
In April 2002, certain officer's life insurance policies were sold to an
unrelated third party, resulting in proceeds to the Company of approximately
$935,000 and a net gain of approximately $811,000, after deducting the cash
surrender value of the policies of approximately $124,000. The proceeds from the
sale of the policies was applied against the Senior Secured Notes as an
additional principal payment in accordance with the requirements of the
Indenture (See Note 5).
11
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
9. INCOME TAXES
The Company incurred a taxable loss of approximately $43,000 for the six months
ended June 30, 2002. In addition the Company has a net operating loss ("NOL")
carryover available from the prior year of approximately $1,475,000, which can
be used to reduce future taxable income. This NOL will expire in 2021. The
income tax provision for the six months ended June 30, 2002 consists of state
minimum taxes of approximately $13,000.
The Company and its subsidiaries are included in the consolidated Federal income
tax return of GMI. The provision for income taxes in the accompanying statements
of operations is allocated to the Company from GMI as if the Company filed
separate income tax returns. Since each member of a consolidated tax group is
jointly and severally liable for Federal income taxes of the entire group, the
Company may be liable for taxes of GMI or other members of the consolidated
group. Under the terms of a Tax Sharing and Indemnification Agreement (the
"Agreement"), the Company can utilize the net operating losses of GMI ("GMI
NOL's") to reduce its income taxes, as long as the Company is a member of GMI's
consolidated group. To the extent that the Company utilizes such GMI NOL's to
reduce its income taxes, it is required to pay GMI, within thirty days after the
Company pays the group consolidated tax liability, an amount that would have
been paid in taxes had the net operating losses of GMI not been available. At
January 1, 2002, GMI had available for Federal income tax purposes GMI NOL's
aggregating approximately $84,751,000, 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. These GMI NOL's expire in tax years 2007 through 2021.
10. CONTINGENCIES
On December 3, 2001, Network Telephone Services ("NTS") filed in Los Angeles
Superior Court (the "Court") a complaint against Robert C. Guccione, GMI and the
Company (collectively the "Defendants") asserting breach of promissory note,
breach of written guarantee, and a declaration of rights and injunctive relief
arising out of a promissory note and several other agreements between NTS and
the Defendants. NTS seeks damages in the amount of approximately $1,098,000,
interest at the rate of 9% per annum from September 1, 2001 and attorneys fees.
The Defendants have filed their answer to the complaint asserting a
cross-complaint requesting a declaration of whether and to what extent the
arbitrary reduction in the rates of payout by an affiliate of NTS breached its
pay-per-call service agreement with the Company. The Court ordered the case to
mediation, which began on June 4, 2002. The Company is in negotiations with NTS
to renew its pay-per-call service and advertising agreements, which renewal
could provide for the settlement of this litigation. In the event these
agreements cannot be negotiated at fair market rates and damages are assessed
against the Company, it will seek to recover any amounts paid to NTS from Robert
C. Guccione and GMI. In light of the concerns related to the Company's
liquidity, which are more fully described in Note 1, it is possible that the
Company would be unable to satisfy a judgement rendered against it by the Court,
should one be assessed. Therefore management believes that an adverse outcome
with respect to these proceedings could have a material adverse effect on its
financial condition or results of operations.
On May 6, 2002, Judith E. Soltesz-Benetton (the "Plaintiff") filed in United
States District Court for the Southern District of New York (the "U.S. Court"),
an action alleging, among other things, that the Company published photographs
of the Plaintiff topless in the June 2002 issue of Penthouse Magazine
(the "Magazine")
12
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
10. (CONTINUED)
without the Plaintiff's permission, falsely representing them to be pictures of
Anna Kournikova. On May 20, 2002, the Company and the Plaintiff reached an
agreement to settle the case for an amount that both parties agreed to keep
confidential. In addition, the Company agreed not to distribute any more copies
of the Magazine and not to put the photographs on its Internet Site, as well as
to apologize to the Plaintiff. The Company was not, however, required to recall
any unsold copies of the Magazine. The settlement of the case did not have a
material adverse effect on the Company's financial condition and results of
operations.
On May 8, 2002, Anna Kournikova ("Anna") filed in United States District Court
for the Central District of California (the "California Court"), an action (the
"Action") alleging, among other things, that the Company published photographs
of a woman topless in the June 2002 issue of Penthouse Magazine, falsely
representing them to be pictures of Anna when they were in reality photographs
of someone else. The Action also alleges that the Company advertised its
intention to make the photographs and a video of the woman available on its
Internet Site on May 10, 2002. The photographs referred to in this Action are
the same photographs as those referred to in the action described in the
preceding paragraph. On May 7, 2002, the Company issued a press release stating
that it had made an unintentional error when it said the photographs were of
Anna and it apologized to Anna and the actual woman in the photographs for the
error. The Company also published the apology on its Internet Site.
Anna seeks a permanent injunction barring the Company from any similar acts
concerning her, barring it from any further distribution of the photographs and
the June 2002 edition of the Magazine, barring it from any references to Anna on
its Internet Site, barring it from representing that any pictures or photographs
on the Internet Site are depictions of Anna, ordering it to deliver or destroy
all materials that have the alleged false representations, ordering the
disgorgement and paying over of all profits it earned and any other unjust
enrichment that it received from the alleged false depiction of Anna, awarding
damages in an unspecified amount not less than $10,000,000, trebling of these
unspecified damages, awarding punitive damages in an unspecified amount and
reimbursement for Anna's costs and attorneys' fees in prosecuting the Action.
The Company has filed a motion to dismiss portions of the complaint and Anna has
filed a cross-motion to freeze $15,000,000 of the Company's assets for purposes
of insuring the payment of a possible judgement, which were both heard in the
California Court on August 5, 2002. On August 9, 2002 the California Court
dismissed Anna's cross-motion. The Company is waiting for the decision of the
California Court with respect to its motion. The Company intends to vigorously
defend itself in this action. It is still too early to determine the possible
outcome of the proceedings. Therefore management cannot give an opinion as to
the effect this Action will have on the Company's financial condition or results
of operations. There can be no assurance, however, that the ultimate liability
from these proceedings will not have a material adverse effect on its financial
condition and results of operations.
On May 24, 2002, Reed Somberg and Liuz Gonzalez individually and on behalf of
all others similarly situated (the "Class Action Plaintiffs") filed in the
Circuit Court of Florida, 11th Judicial Circuit for Miami/Dade County, an
action alleging that the Company committed a "breach of duty" when it published
photographs of a woman topless in the June 2002 issue of Penthouse Magazine,
falsely representing them to be pictures of Anna Kournikova when they were in
reality photographs of someone else. The Class Action Plaintiffs claim they
bought the Magazine prior to learning that the authenticity of the photographs
was in question for the sole
13
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
10. (CONTINUED)
purpose of looking at these photographs. The action requests class-action
certification, a refund of the price of the Magazine, compensation for "lost
value" of the Magazine, court costs and interest. On July 22, 2002, the Company
filed a motion to dismiss the action and is waiting for a response from the
Class Action Plaintiffs' legal counsel. The Company intends to vigorously defend
itself in this action. It is still too early to determine the possible outcome
of the proceedings. Therefore management cannot give an opinion as to the effect
this Action will have on the Company's financial condition or results of
operations. There can be no assurance, however, that the ultimate liability from
these proceedings will not have a material adverse effect on its financial
condition and 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.
11. SEGMENT INFORMATION
The Company is currently engaged in activities in three industry segments:
publishing, online and entertainment. The publishing segment of the Company is
engaged in the publication of Penthouse magazine and four affiliate magazines
(the "Affiliate Publications" and, together with Penthouse magazine, the "Men's
Magazines"), the licensing of the Company's trademarks to publishers in foreign
countries and for use on various consumer products and services. The online
segment is engaged in the sale of memberships to the Company's Internet site
(the "Internet Site"), the sale of advertising banners posted on the Internet
Site and the sale of adult-oriented consumer products through the Company's
online store. The entertainment segment of the Company produces a number of
adult-oriented entertainment products and services, including pay-per-call
telephone lines, digital video discs ("DVD's"), video cassettes and pay-per-view
programming.
14
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
11. (CONTINUED)
Corporate and
reconciling
Publishing Online Entertainment items Consolidated
-------------------------- (in thousands)----------------------------
SIX MONTHS ENDED
JUNE 30, 2002
REVENUES FROM CUSTOMERS $25,443 $3,962 $ 877 $30,282
DEPRECIATION AND AMORTIZATION 234 37 2 273
INCOME (LOSS) FROM OPERATIONS 8,153 2,242 279 (5,559) 5,115
INTEREST EXPENSE 147 3,644 3,791
GAIN ON SALE OF OFFICER'S LIFE
INSURANCE POLICIES 811 811
INTEREST INCOME 4 57 61
SEGMENT PROFIT (LOSS) BEFORE
INCOME TAXES 8,010 2,242 279 (8,335) 2,196
SEGMENT ASSETS 8,873 156 743 9,583 19,355
Six Months Ended
June 30, 2001
Revenues from customers $25,834 $5,542 $1,822 $33,198
Depreciation and amortization 250 41 13 304
Income (loss) from operations 7,878 3,412 1,169 (6,248) 6,211
Interest expense 216 3,877 4,093
Debt restructuring expenses 9,524 9,524
Interest income 11 161 172
Segment profit (loss) before
income taxes 7,673 3,412 1,169 (19,488) (7,234)
Segment assets 12,065 386 1,547 15,373 29,371
Capital expenditures 47 53 100
The Corporate and reconciling items column represents corporate administrative
expenses such as executive, human resources, finance and accounting, management
information systems, costs related to the operation of the corporate and
executive offices, interest expense, interest income, gain on sale of officer's
life insurance policies (in 2002) and, debt restructuring expenses (in 2001)
resulting in the segment profit (loss) shown. Corporate and reconciling items
included in segment assets includes cash, security deposits, the cash surrender
value of officer's life insurance, loan to shareholder and loan to affiliated
company.
The market for the Company's products is worldwide; however approximately eighty
nine percent of the Company's revenue is derived from U.S.-based sources.
15
GENERAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
11. (CONTINUED)
No customer of the Company accounted for more than ten percent of the Company's
net revenue during the six months ended June 30, 2002 and 2001, and no part of
the business is dependent upon a single customer or a few customers, the loss of
any one of which would have a material adverse effect on the Company.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
the consolidated financial statements. In addition, Financial Reporting Release
No. 61 was recently released by the SEC, which requires all companies to include
a discussion to address, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The following
discussion is intended to supplement the summary of significant accounting
policies as described in Note 1 of the Notes to Consolidated Financial
Statements for the year ended December 31, 2001 included in the Company's annual
report on Form 10-K.
These policies were selected because they represent the more significant
accounting policies and methods that are broadly applied in the preparation of
the consolidated financial statements. Revenues, expenses, accrued liabilities
and allowances related to certain of these policies are initially based on our
best estimates at the time of original entry in our accounting records.
Adjustments are recorded when our actual experience differs from the expected
experience underlying the estimates. These adjustments could be material if our
experience were to change significantly in a short period of time. We make
frequent comparisons of actual experience and expected experience in order to
mitigate the likelihood of material adjustments.
a. 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.
These estimates are based upon several factors, including but not
limited to historical trends, days on sale and special editorial or
pictorial content. Estimated revenues are adjusted to actual revenues
as actual sales information becomes available. Actual sales
information generally becomes available ninety days after the on-sale
date for U.S. and Canadian sales and final settlement occurs one
hundred and eighty days after the off-sale date for U.S., Canadian and
international sales.
Advances in the amounts of $1.0 million and $3.0 million relating to
two distribution agreements for the Company's magazines are being
recognized as revenue on a straight-line basis over the ten year terms
of each of the related contracts. An advance in the amount of $0.9
million relating to a licensing agreement for domestic sales of the
Company's digital video disc versions of its video products is being
recognized as revenue on a straight line basis over the seven year
term of the agreement.
16
b. Accrued Retail Display Allowances - Retail display allowances are
payments made to convenience stores, bookstores and newsstands as an
incentive to handle and sell magazines. The formula used to calculate
the allowance is negotiated on an individual basis with each outlet
owner and varies accordingly. However, each formula is based on a
combination of a percentage of sales dollars and an amount per copy
sold. Accruals for retail display allowances are recorded as a
reduction of newsstand revenues on the on-sale date based upon past
experience using the estimated sales of each issue, net of estimated
returns. As new information becomes available the accruals are
adjusted accordingly.
c. Income Taxes - In preparing our financial statements we make estimates
of our current tax exposure and temporary differences resulting from
timing differences for reporting items for book and tax purposes. We
recognize deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred taxes are recognized for differences between the financial
statement and tax basis of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date. In addition, valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized. In consideration of our taxable loss in the current year and
lack of historical ability to generate taxable income to utilize our
deferred tax assets, we have recorded a full valuation allowance.
d. Other Loss Reserves - We have numerous other loss exposures, such as
accounts receivable and circulation shortfall reserves. Establishing
loss reserves for these matters requires the use of estimates and
judgment in regards to risk exposure and ultimate liability. We
estimate losses under the programs using consistent and appropriate
methods; however, changes to our assumptions could materially affect
our recorded liabilities for loss. Where available we utilize
published credit ratings for our debtors to assist us in determining
the amount of required reserves.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement is effective for fiscal years
beginning after December 31, 2001. This supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
while retaining many of the requirements of such statement.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement 13, and Technical Corrections". This
statement is effective for fiscal years beginning after May 15, 2002. This
rescinds SFAS 4, which required all gains and losses from extinguishments of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS 145, companies will be
required to apply the criteria in APB Opinion No. 30, "Reporting the Results of
Operations - reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in
determining the classification of gains and losses resulting from the
extinguishments of debt.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". This statement is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. This requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard
17
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity.
The Company does not believe that these statements will have a material effect
on the Company's financial statements.
Certain provisions of The Emerging Issues Task Force pronouncement EITF 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)", are effective for fiscal periods beginning
after December 15, 2001. The Task Force reached a consensus that consideration
from a vendor to a reseller of the vendor's products is presumed to be a
reduction of the selling prices of the vendor's products and, therefore, should
be characterized as a reduction of revenue when recognized in the vendor's
income statement. Beginning January 2002 the Company adopted this policy as it
relates to retail display allowances. Retail display allowances had been
included in selling, general and administrative expenses prior to the adoption
of this policy. The effect on the Company of the adoption of the policy is a
reduction of newsstand revenue and an equivalent reduction in selling, general
and administrative expenses of $1.5 million and $1.3 million for the six months
ended June 30, 2002 and 2001, respectively. As a result of this adjustment, the
net revenue and the selling, general and administrative expenses of the
publishing segment for the six months ended June 30, 2001 have each been reduced
by approximately $1.3 million to conform to the June 30, 2002 presentation.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company does not utilize off balance sheet financing other than operating
lease arrangements for office premises and related equipment. The following
table summarizes all commitments under contractual obligations as of June 30,
2002:
-------------------Obligations due-----------------
Total 1 2-3 4-5 Over 5
Amount Year Years Years Years
----------------------(In millions)----------------
Senior Secured Notes $46.9 $7.8 $39.1 $ -- $ --
Operating Leases 12.7 1.9 3.7 3.8 3.3
Other Long-Term Liabilities 0.9 0.2 0.5 0.2 --
----- ---- ----- ---- ----
Total Cash Obligations $60.5 $9.9 $43.3 $4.0 $3.3
===== ==== ===== ==== ====
Interest On Senior Secured Notes $12.4 $8.2 $ 4.2 $ -- $ --
===== ==== ===== ==== ====
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had $0.5 million in cash and
cash equivalents, as compared to $2.4 million at December 31, 2001, for a
decrease of $1.9 million during the six month period. The decrease was due to
the use of $0.8 million in operating activities, the net increase in advances to
affiliated companies of $0.9 million and mandatory principal payments for its
Series C Notes of $2.2 million. This was offset in part by the receipt of $0.9
million from the sale of certain officer's life insurance policies on the life
of the principal shareholder (the "Policies") and the collection of $1.0
million of loans receivable from the principal shareholder that arose in prior
periods. Subsequent to June 30, 2002, the Company collected $2.6 million on the
balance due from affiliated companies. This amount and approximately $0.5
million of cash from operations in 2002 was used in July 2002 to pay principal
and interest payments totaling $3.1 million on its
18
Series C Notes. At June 30, 2002, the Company's current liabilities exceeded
current assets by $22.7 million.
In addition to the principal and interest payments made in July 2002, the
Company's Series C Notes require interest payments of approximately $6.4 million
and amortization payments of $6.5 million during the period August 1, 2002 to
June 30, 2003. The management of the Company does not believe it can generate
sufficient funds from operations to make all of these required payments. In the
event that the Company is unable to make these payments, the trustee under the
indenture governing the Series C Notes (the "Indenture") could assume control
over the Company and substantially all of its assets including its registered
trademarks. The Company is seeking other sources of financing to replace its
current debt arrangements. There can be no assurance that the Company will be
successful in locating other sources of financing.
The Company has undertaken the following actions to attempt to achieve
profitability and improve cash flow:
o On February 28, 2002, the Company reduced its workforce by 39
employees (26% of total workforce). This action is expected to reduce
the amount of cash required for salary and benefit expenses by an
estimated $1.8 million during 2002 and an estimated $2.4 million on an
annualized basis.
o Reduced the production costs of its magazines by negotiating
reductions in the price of paper and printing costs, by changing the
paper grades on its magazines and by changing their design to improve
production efficiencies, thereby saving an estimated $0.7 million in
cash during 2002 and an estimated $0.9 million on an annualized basis.
o Reduced the amount of cash expended to promote subscriptions of the
Affiliate Publications and reduced the amount of cash expended on
other selling, general and administrative expenses by an estimated
$1.4 million for 2002 and an estimated $1.6 million on an annualized
basis.
o Improved revenue by adding additional special issues of its magazines.
Based on past experience, this action is expected to generate an
estimated $0.3 million in additional cash during 2002.
o Delayed employee salary increases for five months during 2002. This
action is expected to save an estimated $50,000 in 2002.
o The principal shareholder, Robert C. Guccione, repaid a $1.0 million
loan that arose in prior periods.
o In the month of July 2002, GMI repaid $2.6 million of intercompany
advances.
Since the above actions will not generate sufficient improvements to cash flow
to meet current debt service requirements, the Company is contemplating
additional actions, including seeking other sources of financing, to provide
cash. However, there can be no assurances that management will be able to
achieve such a result.
Cash flows from operating activities
Net cash used in operating activities was $0.8 million for six months ended June
30, 2002, compared to net cash provided by operating activities of $4.2 million
for the six months ended June 30, 2001. Net cash used in operating activities
for the six months ended June 30, 2002 was derived by adjusting the net profit
for the period by the effect of a gain from the sale of officer's life insurance
policies and non-cash items as well as decreased accounts payable and accrued
expenses due to the timing of payments to vendors, and decreased spending on
subscription acquisition drives during the six months ended June 30, 2002. This
was partially offset by decreased paper and art inventories, and prepaid
insurance. The net cash provided by operating
19
activities for the six months ended June 30, 2001, was derived by adjusting the
net loss for the period by the effect of restructuring expenses and non-cash
items as well as a decrease in circulation accounts receivable due to the timing
of advance payments from the Company's newsstand distributor and decreased paper
inventory levels. This was partially offset by increased spending on
subscription acquisition drives and increased payments of interest on the Senior
Secured Notes during the first six months of 2001.
Cash flows from investing activities
Cash flows provided by investing activities were $0.9 million for the six
months ended June 30, 2002, compared to cash flows used in investing activities
of $0.1 million for the six months ended June 30, 2001. The cash provided by
investing activities for the six months ended June 30, 2002 was the result of
the sale of the Policies. The cash used in investing activities for the six
months ended June 30, 2001 was the result of capital expenditures made during
that period.
Cash flows from financing activities
Cash flows used in financing activities were $2.1 million for the six months
ended June 30, 2002, compared to cash flows used in financing activities of $5.6
million for the six months ended June 30, 2001. Cash used in financing
activities for the six months ended June 30, 2002 was the result of advances of
$0.9 million to GMI and payments of $2.2 million in mandatory principal payments
for its Series C Notes, partially offset by $1.0 million in cash received
against a loan from the principal shareholder. Cash used in financing activities
for the six months ended June 30, 2001 was primarily the result of the payment
of debt issuance costs of $1.9 million related to the refinancing of the
Company's Series C Notes (See Notes 5 and 6 of the Notes To Condensed
Consolidated Financial Statements), advances of $2.5 million to GMI during the
six months ended June 30, 2001 and the repayment of $1.2 million of principal
amount of the Notes. GMI repaid $0.4 million of advances during the six months
ended June 30, 2001 by the Company's utilization of GMI's net operating loss
carryforwards in accordance with the tax sharing agreement between the
affiliated companies (See Note 9 of the Notes To Condensed Consolidated
Financial Statements).
Affiliated company advances at June 30, 2002 increased $0.9 million from
December 31, 2001. These balances regularly result from the impact of certain
cost sharing and expense allocation agreements with GMI and its subsidiaries,
whereby certain costs, such as shared corporate salaries and overhead, are paid
by the Company and a portion charged to GMI and its subsidiaries as incurred.
These charges generally result in amounts due to the Company, and are to be
repaid sixty days after the end of each quarter in accordance with the terms of
an expense sharing agreement. In light of the changes to the Indenture made in
connection with the refinancing, which had the effect of permitting an increase
in amounts which may be due from affiliates, the Company intends to amend the
expense sharing agreement in the near future. The ability of the Company to
realize repayment of its advance is dependant upon the success of GMI in
refinancing its existing debt obligations, most of which are currently in
default. At December 31, 2001, the Company had a loan receivable from the
principal shareholder of GMI of $1.0 million. The principal shareholder repaid
$529,000 and $471,000 of this loan in April and May 2002, respectively.
The ability of the Company to incur additional debt is severely limited by the
terms of its Series C Notes and the Indenture. The Series C Notes will mature
on March 29, 2004, bear interest at a rate of 15% per annum from and after
January 1, 2001 and require amortization payments of $5.8 million during the
calendar year 2002 and $6.5 million during the calendar year 2003, with the
balance due in 2004. In addition, further amortization equal to 50% of excess
cash flow in each year will be required, as well as any proceeds from the sale
of certain real property owned by GMI (after payment of existing debt
obligations thereon) and any proceeds to the Company from the sale of the
Policies. The Company made
20
amortization payments of $2.2 million during the first six months of 2002, which
included $935,000 of proceeds from the sale of the Policies (See Note 8).
The Indenture has been extended to the March 29, 2004 maturity of the Series C
Notes. The original Indenture contained covenants, that continue to the new
maturity date, 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 consolidated tangible net
worth deficiency of no greater than $81.6 million, and (iii) restrict the
Company's ability to pay dividends unless certain financial performance tests
are met. The Company's subsidiaries, which are guarantors of the Senior Secured
Notes under the Indenture, however, were and continue to be 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. The Indenture was amended in conjunction with the issuance of
the Series C Notes to reflect the above mentioned payments, to reflect the
March 29, 2004 maturity of the Series C Notes, to provide additional "Change of
Control" events (requiring the commencement of an offer to purchase Notes), to
provide additional flexibility as to the nature of, but also to set a fixed
dollar limit for, "Owner Payments", and to require Noteholder consent to
entering into new lines of business or for sales or other conveyances of the
Penthouse trademark (other than ordinary course licensing) or other assets for
net proceeds in excess of $0.5 million. In addition, the related Security
Agreement was amended to grant additional security interests in inventory and
accounts receivable as well as a security interest in proceeds of the sale of
certain real property owned by GMI (after payment of existing debt obligations
thereon) and on any proceeds to the Company from the sale of the Policies. As
of June 30, 2002, the Company was in compliance with all such covenants.
However as of June 30, 2002 the Company had not made a required principal
redemption of approximately $1.3 million and a required interest payment of
approximately $1.8 million both due by that date. During July 2002, the Company
received approximately $2.6 million from amounts due the Company by affiliated
companies. These funds, along with $0.5 million of cash from operations, were
used by the Company to make the required principal and interest payments within
the applicable grace periods allowed for by the Indenture.
In addition, the Indenture requires that the Company hire a replacement
President and Chief Operating Officer reasonably satisfactory to a majority of
the Holders (the "Holders") within ninety days of the date of either the
resignation or termination of John Prebich, the Company's former President and
Chief Operating Officer to avoid a deemed "Change of Control" which in turn
requires that an offer to purchase be made by the Company to all Holders. On
January 18, 2002, John Prebich was terminated. The Company proposed a
replacement President and Chief Operating Officer to the Holders within the
ninety day period. However the Holders rejected the proposed replacement on
April 25, 2002, after the ninety-day period. In May 2002, the Holders notified
the Company that they believed a "Change of Control" event had occurred due to
the failure of the Company to replace John Prebich within the ninety-day
period. The Company responded by stating that it did not believe a "Change of
Control" event had occurred because it had proposed a replacement for John
Prebich within the ninety-day period, which was rejected after the ninety-day
period. The Company also proposed that it's current Chief Financial Officer,
John Orlando, be accepted as the Company's President and Chief Operating
Officer. The Company and the Holders are entering into a Third Supplemental
Indenture dated as of August 1, 2002 to amend the "Change of Control" events in
the Indenture to add further restrictions on the amount of "Owner Payments", to
substitute John Orlando for John Prebich in the "Change of Control" provision
and to add new financial covenants that require the Company to achieve not less
than 80% of the projected revenues and EBITDA to be set forth in a business
plan that shall be delivered to the Holders no later then September 13, 2002.
In addition the Company agreed to allow the Holders to audit the books and
records of the Company and the payroll records of GMI and to pay all the legal
fees, costs and expenses, and audit fees of the Holders (collectively the
"Amendment Expenses") related to the agreement. The Company recorded $114,000
of Amendment Expenses during the six months ended June 30, 2002. In July 2002,
the Company
21
also paid $100,000 to the Holders as a deposit against Amendment Expenses
expected to be incurred by the Holders in completing the amendment to the
Indenture. In exchange for these amendments the Holders agreed to waive their
complaint that a "Change of Control" had occurred.
Results of Operations (Three Months Ended June 30, 2002 vs. 2001)
Several of the Company's businesses can experience fluctuations in quarterly
performance. For example, newsstand revenues vary from issue to issue with
higher revenues for special and higher priced issues and any issue including
editorial or pictorial features that generate unusual public interest. In
addition, revenues from the licensing of the Company's trademarks, products and
videos vary with the timing of new agreements. As a result, the Company's
performance in any quarterly period is not necessarily reflective of full-year
results.
The Company is currently engaged in activities in three industry segments:
publishing, online and entertainment. The publishing segment of the Company is
engaged in the publication of Penthouse magazine and four affiliate magazines,
the licensing of its trademarks to publishers in foreign countries and for use
on various consumer products and services. The online segment is engaged in the
sale of memberships to the Company's Internet Site, the sale of advertising
banners posted on the Internet Site and the sale of adult-oriented consumer
products through the Company's online store. The entertainment segment of the
Company produces a number of adult-oriented entertainment products and services,
including pay-per-call telephone lines, DVD's, video cassettes and pay-per-view
programming.
The Company's revenues were $16.1 million for the three months ended June 30,
2002, compared to revenues of $16.2 million for the three months ended June 30,
2001, a decrease of $0.1 million. Newsstand revenues were $8.5 million and $8.0
million for the three months ended June 30, 2002 and 2001, respectively, an
increase of $0.5 million. Advertising revenues were $2.5 million and $2.2
million for the three months ended June 30, 2002 and 2001, respectively, an
increase of $0.3 million. Subscription revenues were $2.2 million and $1.8
million for the three months ended June 30, 2002 and 2001, respectively, an
increase of $0.4 million. Revenues for the online segment were $1.9 million and
$2.5 million for the three months ended June 30, 2002 and 2001, respectively, a
decrease of $0.6 million. Revenues from the Entertainment Segment were $0.5
million and $0.9 million for the three months ended June 30, 2002 and 2001
respectively, a decrease of $0.4 million. Revenues from the Company's video
business were $0.3 million and $0.7 million for the three months ended June 30,
2002 and 2001, respectively, a decrease of $0.4 million. Revenues from the
Company's pay-per-call business were $0.1 million and $0.2 million for the three
months ended June 30, 2002 and 2001, respectively, a decrease of $0.1 million.
Income from operations was $3.5 million and $3.0 million for the three months
ended June 30, 2002 and 2001 respectively, an increase of $0.5 million. Income
from operations was impacted by:
o an increase in the number of mens magazines sold due to an additional issue
of Penthouse magazine and Girls Of Penthouse magazine in the second quarter
and an issue of Penthouse magazine which created a controversy that
generated a high level of public interest,
o an increase in subscription revenue due to the additional issue of
Penthouse magazine,
o an increase in advertising revenue due to an additional issue of Penthouse
magazine and Girls Of Penthouse magazine,
22
o decreased selling, general and administrative expenses due to decreased
salaries, benefits and bank charges, partially offset by,
o decreased revenues from the online and entertainment segments, and
o increased production costs as a result the printing of the additional
issue of Penthouse magazine and Girls Of Penthouse magazine, partially
offset by lower paper costs as a result of negotiating reductions in
the price of paper and changing the grades of paper used to produce
the magazines, and lower printing costs as a result of negotiating
reductions in the cost of printing the magazines and by changing the
magazines' design to improve production efficiencies.
Net other expense was $(1.0) million for the three months ended June 30, 2002
compared to net other expense of $(2.0) million for the three months ended June
30, 2001. Included in net other expense for the year ended June 30, 2002 is
interest expense of $1.8 million, compared to interest expense of $2.0 million
for the three months June 30, 2001, a decrease of $0.2 million. Included in net
other expense for the three months ended June 30, 2002 is a gain on the sale of
the Policies on the life of the principal shareholder of $0.8 million.
As a result of the above discussed factors, net profit before the provision for
income taxes for the three months ended June 30, 2002 was $2.5 million, compared
to a net profit of $0.9 million for the three months ended June 30, 2001.
The net revenues and income from operations of the Company were (in millions):
Income
Net Revenue From Operations
---------------------- ---------------------
Three Months Three Months
Ended Ended
June 30, June 30,
---------------------- ---------------------
2001 2002 2001 2002
------- ------- ------- -------
Publishing Segment $ 12.8 $ 13.7 $ 4.1 $ 5.0
Online Segment 2.5 1.9 1.3 1.1
Entertainment Segment 0.9 0.5 0.6 0.2
------- ------- ------- -------
$ 16.2 $ 16.1 $ 6.0 $ 6.3
Corporate Administrative Expenses (3.0) (2.8)
------- ------- ------- -------
$ 16.2 $ 16.1 $ 3.0 $ 3.5
======= ======= ======= =======
23
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Income
Net Revenue From Operations
------------------ ------------------
Three Months Ended Three Months Ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
------ ------ ------ ------
Penthouse Magazine and
the Affiliate Publications $12.3 $13.3 $ 3.7 $ 4.7
Foreign Edition Licensing 0.5 0.4 0.4 0.3
----- ----- ----- -----
$12.8 $13.7 $ 4.1 $ 5.0
===== ===== ===== =====
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $13.3
million and $12.3 million for the three months ended June 30, 2002 and 2001,
respectively, an increase of $1.0 million. Newsstand revenue was $8.5 million
and $8.0 million for the three months ended June 30, 2002 and 2001,
respectively, an increase of $0.5 million. The increase in the second quarter of
2002 is primarily attributable to an increase in the number of copies of
Penthouse magazine and the Affiliate Publications sold, primarily as a result of
sales of an additional issue of Penthouse magazine and Girls Of Penthouse
magazine, and sales of an issue of Penthouse magazine which created a
controversy that generated a high level of public interest. The additional
revenue from these factors was partially offset by the continued weakness in the
economy and by the continued loss of newsstand distribution outlets due to the
change in social climate towards men's magazines, together with advances in
electronic technology, including the proliferation of retail video outlets and
the increased market share of cable television and the internet, as well as
ongoing acquisitions and consolidations of companies in the magazine
distribution industry which have for several years resulted in a reduction in
the number of outlets carrying the Company's magazines. To attempt to offset
this decline, the Company has implemented special marketing strategies aimed at
developing new outlets for its magazines and rewarding growth in sales by
distributors. Newsstand revenues were further impacted by an increase in retail
display allowances of $0.1 million, which are now netted against revenue as a
result of the adoption of the new Emerging Issues Task Force pronouncement EITF
01-9 as described under "Impact Of Recently Issued Accounting Pronouncements" on
page 18. Advertising revenue was $2.5 million and $2.2 million for the three
months ended June 30, 2002 and 2001, respectively, an increase of $0.3 million.
The increase in advertising revenue is primarily attributable to the additional
issue of Penthouse magazine in the second quarter and an increase in the number
of pages sold in Penthouse magazine and the affiliate publications, partially
offset by a decrease in the average rate per page of advertising pages sold in
these publications. Subscription revenue was $2.2 million and $1.8 million for
the three months ended June 30, 2002 and 2001, respectively, an increase of $0.4
million. The increase is primarily attributable to the additional issue of
Penthouse in the second quarter of 2002.
Publishing-production, distribution and editorial expenses were $6.2 million and
$6.0 million for the three months ended June 30, 2002 and 2001, respectively, an
increase of $0.2 million. Paper costs were $2.1 million for both the three
months ended June 30, 2002 and 2001, respectively. Print costs were $2.3 million
for the
24
three months ended June 30, 2002, compared to $2.2 million for the three months
ended June 30, 2001, an increase of $0.1 million. The increase is primarily due
to the cost of producing the additional issue of Penthouse magazine and Girls Of
Penthouse magazine in the second quarter of 2002, partially offset by a decrease
in the number of copies printed per issue, a decrease in the cost of paper as a
result of negotiating a reduction in the price of paper and changing the grades
of paper used to produce the magazines, and a decrease in printing costs as a
result of negotiating lower costs of printing and changes made in the design of
the Company's magazines to improve production efficiencies. Distribution costs
were $1.1 million and $1.0 million for the three months ended June 30, 2002 and
2001, respectively, an increase of $0.1 million. Editorial costs were $0.7
million for both the three months ended June 30, 2002 and 2001.
Selling, general and administrative expenses were $2.4 million for the three
months ended June 30, 2002, compared to $2.6 million for the three months ended
June 30, 2001, a decrease of $0.2 million. The decrease is primarily due to a
decrease in salary and benefits expense of $0.1 million and a decrease in
subscription costs of $0.1 million during the three months ending June 30, 2002.
FOREIGN EDITION LICENSING
Revenues from licensing of foreign editions were $0.4 million and $0.5 million
for the three months ended June 30, 2002 and 2001, respectively, a decrease of
$0.1 million.
Selling, general and administrative expenses were $0.1 million for both the
three months ended June 30, 2002 and 2001.
ONLINE SEGMENT
Revenues for the online segment were $1.9 million and $2.5 million for the three
months ended June 30, 2002 and 2001, respectively, a decrease of $0.6 million.
This decrease is primarily attributable to a decrease in the sale of memberships
to the Internet Site of $0.4 million and decreased advertising revenues from
banners on the Internet Site of $0.2 million during the three months ending June
30, 2002. The decrease in revenue from the sale of memberships to the Internet
Site resulted from a decrease in the average price of the memberships sold,
partially offset by an increase in the number of new members. The number of
members to the Company's Internet Site has increased 14% as compared to the
second quarter of 2001 as a result of the changes in the pricing of memberships
and special promotions aimed at attracting new members. To attempt to offset the
decrease in the price of memberships, the Company plans to adjust its pricing
plans further in an effort to increase the average price paid by new members. In
addition, the Company began accepting on-line electronic check payments in July
2002 as an additional payment method and plans to enter into cross-marketing
programs with other web sites to increase the amount of traffic to the Internet
Site. The decrease in advertising revenue is primarily attributable to the
weakness in the U.S. economy during 2001, which has continued to effect
advertising budgets well into 2002. To offset this decline, the Company has
intensified its efforts to attract more advertising to the Internet Site.
Direct costs were $26,000 and $119,000 for the three months ended June 30, 2002
and 2001, respectively, a decrease of $93,000. The decrease is primarily
attributable to a decrease in fees paid to content providers of $80,000 for the
three months ended June 30, 2002.
Selling general and administrative expenses were $0.7 million for the three
months ended June 30, 2002, compared to $1.0 million for the three months ended
June 30, 2001, a decrease of $0.3 million. The decrease is primarily
attributable to a decrease in salary and benefit expense of $0.2 million and
bank charges of $0.1
25
million during the three months ended June 30, 2002.
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $0.5 million for the three months
ended June 30, 2002, compared to $0.9 million for the three months ended June
30, 2001, a decrease of $0.4 million. The Company's video business revenues were
$0.4 million for the three months ended June 30, 2002 compared to $0.7 million
for the three months ended June 30, 2001, a decrease of $0.3 million. Revenues
for the three months ended June 30, 2002 were lower due to sales in the prior
period from a series of movies produced under a joint venture co-operation
agreement, revenue in the prior period from several foreign licensing agreements
which were not renewed in the current year and sales in the prior period of
several re-released catalog titles. Revenues from the Company's pay-per-call
business were $0.1 million and $0.2 million for the three months June 31, 2002
and 2001, respectively, a decrease of $0.1 million. Revenues for the three
months ended June 30, 2002 were lower due to lower billable minutes.
Direct costs were $0.2 million and $0.1 million for the three months ended June
30, 2002 and 2001, respectively, an increase of $0.1 million. The increase is
attributable to increased video production costs for the three months ending
June 30, 2002.
Selling, general and administrative expenses were $0.1 million for both the
three months ended June 30, 2002 and 2001 respectively.
CORPORATE ADMINISTRATIVE EXPENSE
Included in selling, general and administrative expenses are corporate
administrative expenses which 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 $2.8 million for the three months ended
June 30, 2002, compared to $3.0 million for the three months ended June 30,
2001, a decrease of $0.2 million. This decrease is primarily attributable to
decreased salary and benefit expense of $0.2 million for the three months ended
June 30, 2002.
BAD DEBT EXPENSE
Bad debt expense was $44,000 for the three months ended June 30, 2002, compared
to $39,000 for the three months ended June 30, 2001, an increase of $5,000.
RENT EXPENSE FROM AFFILIATED COMPANIES
Rent expense from affiliated companies represents charges from an affiliated
company for the use by the Company of the affiliate's facilities. The charge is
based upon the Company's proportionate share of the operating expenses of such
facilities. Rent expense from affiliated companies was $0.2 million for both the
three months ended June 30, 2002 and 2001.
Results of Operations (Six Months Ended June 30, 2002 vs. 2001)
The Company's revenues were $30.3 million for the six months ended June 30,
2002, compared to revenues of $33.2 million for the six months ended June 30,
2001, a decrease of $2.9 million. Newsstand revenues were
26
$15.7 million and $16.3 million for the six months ended June 30, 2002 and 2001,
respectively, a decrease of $0.6 million. Advertising revenues were $4.4 million
and $4.3 million for the six months ended June 30, 2002 and 2001, respectively,
an increase of $0.1 million. Subscription revenues were $4.0 million and $3.7
million for the six months ended June 30, 2002 and 2001, respectively, an
increase of $0.3 million. Revenues for the online segment were $4.0 million and
$5.5 million for the six months ended June 30, 2002 and 2001, respectively, a
decrease of $1.5 million. Revenues from the Entertainment Segment were $0.9
million and $1.8 million for the six months ended June 30, 2002 and 2001,
respectively, a decrease of $0.9 million. Revenues from the Company's video
business were $0.6 million and $1.4 million for the six months ended June 30,
2002 and 2001, respectively, a decrease of $0.8 million. Revenues from the
Company's pay-per-call business were $0.3 million and $0.4 million for the six
months ended June 30, 2002 and 2001, respectively, a decrease of $0.1 million.
Income from operations was $5.1 million and $6.2 million for the six months
ended June 30, 2002 and 2001 respectively, a decrease of $1.1 million. Income
from operations was impacted by:
o a decrease in the number of mens magazines sold, and
o decreased revenues from the online and entertainment segments, partially
offset by:
o revenue from an additional issue of Penthouse magazine and Girls of
Penthouse magazine in the second quarter of 2002,
o decreased production costs and distribution costs as a result of
negotiating reductions in the price of paper and changing the grades of
paper used to produce the magazines, and lower printing costs as a
result of negotiating reductions in the cost of printing and by
changing the magazines' design to improve production efficiencies,
o decreased selling, general and administrative expenses due to decreased
salaries and benefits expense, partially offset by increased insurance
expense, and
o decreased bad debt expense.
Net other expense was $(2.9) million for the six months ended June 30, 2002
compared to net other expense of $(13.4) million for the six months ended June
30, 2001. Included in net other expense for the six months ended June 30, 2002
is interest expense of $3.8 million, compared to interest expense of $4.1
million for the six months June 30, 2001, a decrease of $0.3 million. Included
in net other expense for the six months ended June 30, 2002 is a gain on the
Policies on the life of the principal shareholding of $0.8 million. Included in
net other expense for the six months ended June 30, 2001 are debt restructuring
expenses of $9.5 million related to the refinancing of the Company's Notes on
March 29, 2001 (see Note 6 of the Notes To Condensed Consolidated Financial
Statements).
As a result of the above discussed factors, net income before the provision for
income taxes for the six months ended June 30, 2002 was $2.2 million, compared
to a net loss of $7.2 million for the six months ended June 30, 2001.
27
The net revenues and income from operations of the Company were (in millions):
Income
Net Revenue From Operations
------------------ ------------------
Six Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
------ ------ ------ ------
Publishing Segment $25.8 $25.4 $ 7.9 $ 8.2
Online Segment 5.6 4.0 3.4 2.2
Entertainment Segment 1.8 0.9 1.2 0.3
----- ----- ----- -----
$33.2 $30.3 $12.5 $10.7
Corporate Administrative Expenses (6.3) (5.6)
----- ----- ----- -----
$33.2 $30.3 $ 6.2 $ 5.1
===== ===== ===== =====
PUBLISHING SEGMENT
The net revenues and income from operations of the Publishing Segment were as
follows (in millions):
Income
Net Revenue From Operations
------------------ ------------------
Six Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
------ ------ ------ ------
Penthouse Magazine and
the Affiliate Publications $24.8 $24.6 $ 7.1 $ 7.5
Foreign Edition Licensing 1.0 0.8 0.8 0.7
----- ----- ----- -----
$25.8 $25.4 $ 7.9 $ 8.2
===== ===== ===== =====
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS
Revenues for Penthouse magazine and the Affiliate Publications were $24.6
million and $24.8 million for the six months ended June 30, 2002 and 2001,
respectively, a decrease of $0.2 million. Newsstand revenue was $15.7 million
and $16.4 million for the six months ended June 30, 2002 and 2001, respectively,
a decrease of $0.7 million. The decrease is primarily attributable to a decrease
in the number of copies of Penthouse magazine and the Affiliate Publications
sold resulting in a decrease in newsstand revenue of $0.5 million and increased
retail display allowances of $0.2 million, which are now netted against revenue
as a result of the adoption of the of the new Emerging Issues Task Force
pronouncement EITF 01-9 as described under "Impact Of Recently Issued Accounting
Pronouncements" on page 18. Newsstand sales have been adversely affected by the
continued weakness in the economy and by the continued loss of newsstand
distribution outlets due to the change in social climate towards men's
magazines, together with advances in electronic technology, including the
proliferation of retail video outlets and the increased market share of cable
television and the internet, as well as ongoing acquisitions and consolidations
of companies in the magazine distribution industry which have for several years
resulted in a reduction in the number of outlets carrying the Company's
magazines. To attempt to offset this decline, the Company has implemented
special marketing strategies aimed at developing new outlets for its magazines
and rewarding growth in sales by distributors. Advertising revenue
28
was $4.4 million and $4.3 million for the six months ended June 30, 2002 and
2001, respectively, an increase of $0.1 million. The increased revenue is
attributable to an additional issue of Penthouse magazine and Girls Of Penthouse
magazine in 2002 and an increase in the number of advertising pages sold,
partially offset by a decrease in the average rate per page of advertising pages
sold in Penthouse magazine and the Affiliate Publications. Subscription revenue
was $4.0 million and $3.7 million for the six months ended June 30, 2002 and
2001, respectively, an increase of $0.3 million. The increase is attributable to
the additional issue of Penthouse magazine in the second quarter of 2002,
partially offset by a decrease in the number of subscribers per issue.
Publishing-production, distribution and editorial expenses were $11.6 million
and $12.1 million for the six months ended June 30, 2002 and 2001, respectively,
a decrease of $0.5 million. Paper costs were $4.0 million and $4.4 million for
the six months ended June 30, 2002 and 2001, respectively, a decrease of $0.4
million. Print costs were $4.2 million for the six months ended June 30, 2002,
compared to $4.3 million for the six months ended June 30, 2001, a decrease of
$0.1 million. The decreases are due primarily to lower paper costs as a result
of negotiating reductions in the price of paper, changing the grades of paper
used to produce the magazines, a decrease in the number of pages per issue and a
decrease in printing costs as a result of negotiating lower costs of printing
and changes made in the design of the Company's magazines to improve production
efficiencies, partially offset by an increase in the number of copies printed as
a result of an additional issue of Penthouse magazine and Girls of Penthouse
magazine in the second quarter of 2002. Distribution costs were $2.0 million and
$2.1 million for the six months ended June 30, 2002 and 2001, respectively, a
decrease of $0.1 million. Editorial costs were $1.4 million and $1.3 million for
the six months ended June 30, 2002 and 2001, respectively, an increase of $0.1
million.
Selling, general and administrative expenses were $5.5 million for the six
months ended June 30, 2002, compared to $5.7 million for the six months ended
June 30, 2001, a decrease of $0.2 million. The decrease is primarily due to a
decrease in bad debt expense of $0.3 million and salaries and benefits of $0.2
million, partially offset by an increase in subscription costs of $0.3 million
during the six months ending June 30, 2002.
Trends - Penthouse and the Affiliate Publications
Over the last several years, the number of newsstand copies of Penthouse
magazine and the Affiliate Publications sold per issue has trended downward.
From the first half of 1998 to the first half of 2002, Penthouse magazine 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 the social climate towards men's
magazines, together with advances in electronic technology, as outlined above,
as well as ongoing acquisitions and consolidations of companies in the magazine
distribution industry have largely contributed to the overall decrease in
circulation. In addition, the newsstand sales of 2001 and 2002 have been
negatively impacted by the economic recession that began in 2001 and the failure
of the economy to make a significant recovery in 2002. The Company has raised
the cover prices of the magazines and reduced production costs to partially
offset the decline in newsstand circulation. The Company believes that the most
significant consolidations likely in the magazine distribution industry have
already taken place and that newsstand sales will remain fairly stable during
the remainder of 2002 as a result of the special marketing strategies it has
implemented aimed at developing new outlets for its magazines and rewarding
growth in sales by distributors and the addition of extra issues of certain of
the Company's magazines during the year ended 2002. These positive trends are
expected to be partially offset by a continued loss of outlets due to various
factors, including changes in the ownership of chains of convenience stores,
which can result in a loss of business if a new owner no longer wishes to carry
adult oriented products. As a result of these factors, the Company believes that
newsstand sales for 2002 will fall slightly below 2001. However, these results
are
29
partially dependent on the strength of the economy during the second half of
2002, which is uncertain at this time.
The advertising revenues of Penthouse magazine and the Affiliate Publications
have also declined over the past several years. The primary reason for the
decrease in advertising revenue has been the decrease in the average monthly
circulation of the Company's magazines, which has the effect of decreasing
advertising rates. In addition, there has been a steady decrease in pay-per-call
advertising over the past several years as competition in the pay-per-call
industry has caused rates per minute to decrease and as pay-per-call services
have attracted less of an audience in recent years. The Company believes that
despite this trend, advertising revenue will remain fairly stable during the
remainder of 2002 as magazine circulation stabilizes for the reasons stated
above and as a result of the recovery in the advertising market currently under
way. However the Company expects advertising revenue to decline in following
years as a result of the decreasing demand for pay-per-call services.
The Company has also experienced a steady decline in the number of sales of
subscription copies of Penthouse magazine and the Affiliate Publications over
the past several years. The Company believes the reasons for the decrease are
similar to the reasons for the declining newsstand sales, but has also resulted
from increases in the subscription prices of the magazines and lowered discounts
offered to subscription agents. The Company increased the subscription prices of
the magazines and lowered discounts to subscription agents in order to increase
the profitability of subscription sales. The Company is not planning to increase
the subscription prices for the magazines in the near term and expects the
number of subscription sales to remain fairly stable during 2002. However, the
11.6% increase in postal rates that went into effect in July 2002 is expected to
reduce the profitability of subscription sales by approximately $350,000 on an
annualized basis. The Company will attempt to partially offset the effect of
this increase by reducing its subscription related promotional expenses.
The Company has been steadily reducing its publishing-production, distribution
and editorial expenses over the past several years by reducing the number of
copies printed, reducing the number of pages per issue, negotiating reductions
in paper and printing costs and changing the grades of paper used to produce the
magazines. These expenses are expected to decrease further in 2002 as a result
of further changes made in paper grades on some of the magazines and changes
made to the design of the Company's magazines to improve production
efficiencies. However, the decrease in printing costs is expected to be
partially offset by increases for inflation contained in the Company's contracts
with its printers. The Company projects that paper prices, which decreased
during 2001, will remain stable during the remainder of 2002. However, paper
prices are volatile and several large paper companies have announced that they
are considering price increases in the near future that may affect results in
future years. A large increase in prices could have a material adverse affect on
the Company's cash flows and profitability.
Selling, general and administrative expenses are expected to decrease as a
result of a reduction in the number of employees in 2002. In future years,
selling, general and administrative expenses are expected to increase at about
the same rate as inflation.
FOREIGN EDITION LICENSING
Revenues from licensing of foreign editions were $0.8 million and $1.0 million
for the six months ended June 30, 2002 and 2001, respectively, a decrease of
$0.2 million. The decrease in revenues in 2002 resulted when some of Company's
licensees stopped publishing magazines in their respective markets. The Company
is in the process of attempting to find new licensees to replace the ones that
were lost in these markets.
30
Selling, general and administrative expenses were $0.2 million for both the six
months ended June 30, 2002 and 2001.
Trends - Foreign Edition Licensing
Revenue from licensing of foreign editions has remained fairly stable over the
past several years. While declining circulation in mens magazines around the
world has resulted in lower royalty payments per licensee each year, the Company
has been able to maintain its licensing revenue by adding new licensees to
offset the declining royalty payments. The Company expects this trend to
continue and for foreign edition licensing revenue to remain fairly consistent
during 2002.
In 2002 and future years, selling, general and administrative expenses for
foreign edition licensing are expected to increase at about the same rate as
inflation.
ONLINE SEGMENT
Revenues for the online segment were $4.0 million and $5.6 million for the six
months ended June 30, 2002 and 2001, respectively, a decrease of $1.6 million.
This decrease is primarily attributable to a decrease in revenue from the sale
of memberships to the Internet Site of $1.2 million and decreased advertising
revenues from banners on the Internet Site of $0.4 million during the six months
ending June 30, 2002. The decrease in revenue from the sale of memberships to
the Internet Site resulted from a decrease in the average price of the
memberships sold, partially offset by an increase in the number of new members.
The number of members to the Company's Internet Site has increased 18% over the
past three quarters as a result of the changes in the pricing of memberships and
special promotions aimed at attracting new members. To attempt to offset the
decrease in the price of memberships, the Company plans to adjust its pricing
plans further in an effort to increase the average price paid by new members. In
addition, the Company began accepting on-line electronic check payments in July
2002 as an additional payment method and plans to enter into cross-marketing
programs with other web sites to increase the amount of traffic to the Internet
Site. The decrease in advertising revenue is primarily attributable to the
weakness in the U.S. economy during 2001, which has continued to effect
advertising budgets well into 2002. To offset this decline, the Company has
intensified its efforts to attract more advertising to the Internet Site.
Direct costs were $0.1 million and $0.3 million for the six months ended June
30, 2002 and 2001, respectively, a decrease of $0.2 million. The decrease is
primarily attributable to a decrease in fees paid to content providers of $0.2
million for the six months ended June 30, 2002.
Selling general and administrative expenses were $1.6 million for the six months
ended June 30, 2002, compared to $1.9 million for the six months ended June 30,
2001, a decrease of $0.3 million. The decrease is primarily attributable to a
decrease in salaries and benefits of $0.2 million, advertising expense of $0.1
million and promotional expense of $0.1 million, partially offset by increased
data processing fees of $0.1 million during the six months ended June 30, 2002.
Trends - Online Segment
Revenues from the online segment, which had declined during 2001, primarily as a
result of the use of more aggressive credit card validation methods required to
comply with Visa's requirements, continued to decline in the first six months of
2002. The Company believes, however, that revenues will start to increase
slightly toward the second half of 2002 as a result of the changes it is making
to its pricing structure and the cross-
31
marketing programs it plans to enter into to bring traffic to the Internet Site,
as stated above. However, the results will also depend on the strength of the
economy during the second half of 2002, which is uncertain at this time. The
Company does not believe it will need to intensify its validation methods any
further to meet Visa's requirements. However, Visa has the right to modify the
maximum chargeback level at any time. Should Visa decide to reduce the maximum
chargeback level, the Company may need to intensify its validation methods
further to meet the new requirements, which would result in a decrease in the
number of customers who would be accepted as members of the Internet Site.
MasterCard recently established its own regulations for maximum chargeback and
refund levels that went into effect in April 2002. The Company believes that its
chargeback and refund levels fall well within those required by the new
MasterCard regulations and the new regulations will have no material effect on
the sales of memberships to the Internet Site. There is also the possibility
that one or more of the credit card companies may decide to stop processing
adult on-line internet transactions altogether, which most likely would result
in a decrease in the online revenue. While the Company has intensified its
efforts to attract more advertisers to the Internet Site, it believes that the
current weak market for internet advertising will cause revenues from
advertising banners in the Internet Site for the year 2002 to fall below that of
the prior year. Revenue from the online store is expected to remain fairly
consistent with that of 2001.
Direct costs are expected to decrease in 2002 as a result of decreases in fees
paid to content providers and are expected to remain fairly consistent in future
years.
Selling, general and administrative expenses are expected to decrease in 2002
due to a reduction in the number of employees and in future years to increase at
about the same rate as inflation.
ENTERTAINMENT SEGMENT
Revenues from the Entertainment Segment were $0.9 million for the six months
ended June 30, 2002, compared to $1.8 million for the six months ended June 30,
2001, a decrease of $0.9 million. The Company's video business revenues were
$0.6 million for the six months ended June 30, 2002 compared to $1.4 million for
the six months ended June 30, 2001, a decrease of $0.8 million. Revenues for the
six months ended June 30, 2002 were lower due to sales in the prior period from
a series of movies produced under a joint venture co-operation agreement,
revenue in the prior period from several foreign licensing agreements which were
not renewed in the current year and sales in the prior period of several
re-released catalog titles. The amount of video business revenues earned in each
period varies with the timing of new contracts for the production and
distribution of movies. During 2002 the Company has been in the process of
establishing new business relationships to provide additional movies for
distribution, but was unable to complete sufficient contracts to sustain the
level of production achieved in the prior year. Revenues from the Company's
pay-per-call business were $0.3 million and $0.4 million for the six months June
30, 2002 and 2001, respectively, a decrease of $0.1 million. Revenues for the
six months ended June 30, 2002 were lower due to lower billable minutes.
Direct costs were $0.4 million and $0.2 million for the six months ended June
30, 2002 and 2001, respectively, an increase of $0.2 million. The increase is
attributable to increased video production costs for the six months ending June
30, 2002.
Selling, general and administrative expenses were $0.2 million and $0.4 million
for the six months ended June 30, 2002 and June 30, 2001 respectively, a
decrease of $0.2 million. The decrease is primarily attributable to decreased
salary and benefits expense of $0.1 million and decreased commissions of $0.1
million.
32
Trends - Entertainment Segment
Revenues from the Entertainment Segment have been declining over the past few
years primarily as a result of a steady decrease in demand for pay-per-call
services. The Company expects pay-per-call revenue to continue to decline during
2002 and thereafter. The Company's video business revenues for the first half of
2002 have decreased over the prior year, for the reasons stated above, but are
expected to improve in the second half of 2002 as a result of the timing of
certain of the Company's cable agreements. However results for the second half
of 2002 and on an annual basis are expected to still fall significantly below
that of the prior year. The Company is in the process of establishing new
business relationships to increase its video business revenue for 2003 and
thereafter.
Direct costs are expected to increase at about the same rate as inflation in
2002. Selling, general and administrative expenses are expected to decrease in
2002 due to a reduction in the number of employees.
CORPORATE ADMINISTRATIVE EXPENSE
Included in selling, general and administrative expenses are corporate
administrative expenses which 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 $5.6 million for the six months ended
June 30, 2002, compared to $6.3 million for the six months ended June 30, 2001,
a decrease of $0.7 million. This decrease is primarily attributable to decreased
salaries and benefits of $0.6 million and decreased bad debt expense of $0.4
million, partially offset by an increase in insurance expenses of $0.3 million
for the six months ended June 30, 2002.
Trends - Corporate Administrative Expense
Corporate administrative expenses are expected to decrease during 2002 due to a
reduction in the number of employees.
BAD DEBT EXPENSE
Bad debt expense was $0.1 million for the six months ended June 30, 2002,
compared to $0.8 million for the six months ended June 30, 2001, a decrease of
$0.7 million. The decrease is primarily attributable to the recording of a
reserve of $0.4 million in the prior year related to receivables from KC
Publishing, Inc., a company owned by the Company's former President and Chief
Operating Officer and the recording of a reserve of $0.3 million in the prior
year related to receivables from subscription agents. The Company had
established these reserves because collectibility of these amounts was not
assured. The reserve related to receivables from KC Publishing has been included
in corporate administrative expenses. The reserve related to receivables from
subscription agents has been included in the selling, general and administrative
expenses of Penthouse Magazine and the Affiliate Publications. The Company does
not believe it will need to make any material adjustments to these reserves in
the current year.
RENT EXPENSE FROM AFFILIATED COMPANIES
Rent expense from affiliated companies represents charges from an affiliated
company for the use by the Company of the affiliate's facilities. The charge is
based upon the Company's proportionate share of the
33
operating expenses of such facilities. Rent expense from affiliated companies
was $0.3 million for both the six months ended June 30, 2002 and 2001,
respectively.
Forward-Looking Statements
In addition to historical information, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements as to expectations, beliefs, plans, objectives and future financial
performance, and assumptions underlying or concerning the foregoing. These
forward-looking statements involve risks and uncertainties and are based on
certain assumptions, which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The following
are important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements: (a)
government actions or initiatives, including (1) attempts to limit or otherwise
regulate the sale of adult-oriented materials, including print, video and online
materials; (2) regulation of the advertisement of tobacco products, or (3)
significant changes in postal regulations or rates, (b) increases in paper
prices; (c) increased competition for advertisers from other publications and
media or any significant decrease in spending by advertisers generally, or with
respect to the adult male market; (d) effects of the consolidations taking place
among businesses which are part of the magazine distribution system; (e)
uncertainty with regard to the future market for entertainment, e-commerce and
advertising by way of the Internet, (f) the impact on advertising sales of a
slow-down or recession in the economy, an increasingly competitive environment
and competition from other content and merchandise providers; (g) the impact of
terrorist attacks; (h) the ability of the Company to generate sufficient cash
from future operations to make all the payments required under the Series C
Notes; and (i) the ability to obtain alternative financial sources to repay the
principal amount of the Notes at maturity. Readers are cautioned not to place
undue reliance in these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates. Management
does not believe that it has any foreign currency rate risk.
Interest Rates-As of December 31, 2000, the Company had debt of $52.0 million
with a fixed rate of 10 5/8%. On March 29, 2001 the Company exchanged $51.5
million of this debt for new debt with a fixed rate of 15% and retired $0.5
million of the debt. In July 2001, October 2001, December 2001, April 2002 and
May 2002, the Company retired $0.7 million, $1.1 million, $0.7 million, $1.2
million and $0.9 million of the new debt, respectively in accordance with the
requirements of the Series C Notes. 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.
34
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 3, 2001, Network Telephone Services ("NTS") filed in Los Angeles
Superior Court (the "Court") a complaint against Robert C. Guccione, GMI and the
Company (collectively the "Defendants") asserting breach of promissory note,
breach of written guarantee, and a declaration of rights and injunctive relief
arising out of a promissory note and several other agreements between NTS and
the Defendants. NTS seeks damages in the amount of approximately $1.1 million,
interest at the rate of 9% per annum from September 1, 2001 and attorney's fees.
The Defendants have filed their answer to the complaint asserting a
cross-complaint requesting a declaration of whether and to what extent the
arbitrary reduction in the rates of payout by an affiliate of NTS breached its
pay-per-call service agreement with the Company. The Court ordered the case to
mediation, which began on June 4, 2002. The Company is in negotiations with NTS
to renew its pay-per-call service and advertising agreements, which renewal
could provide for the settlement of this litigation. In the event these
agreements cannot be negotiated at fair market rates and damages are assessed
against the Company, it will seek to recover any amounts paid to NTS from Robert
C. Guccione and GMI. In light of the concerns related to the Company's
liquidity, which are more fully described in Note 1 to the Condensed
Consolidated Financial Statements, it is possible that the Company would be
unable to satisfy a judgement rendered against it by the Court, should one be
assessed. Therefore management believes that an adverse outcome with respect to
these proceedings could have a material adverse effect on its financial
condition or results of operations.
On May 6, 2002, Judith E. Soltesz-Benetton (the "Plaintiff") filed in United
States District Court for the Southern District of New York (the "U.S. Court"),
an action alleging, among other things, that the Company published photographs
of the Plaintiff topless in the June 2002 issue of Penthouse Magazine (the
"Magazine") without the Plaintiff's permission, falsely representing them to be
pictures of Anna Kournikova. On May 20, 2002, the Company and the Plaintiff
reached an agreement to settle the case for an amount that both parties agreed
to keep confidential. In addition, the Company agreed not to distribute any more
copies of the Magazine and not to put the photographs on its Internet Site, as
well as to apologize to the Plaintiff. The Company was not, however, required to
recall any unsold copies of the Magazine. The settlement of the case did not
have a material adverse effect on the Company's financial condition and results
of operations.
On May 8, 2002, Anna Kournikova ("Anna") filed in United States District Court
for the Central District of California (the "California Court"), an action (the
"Action") alleging, among other things, that the Company published photographs
of a woman topless in the June 2002 issue of Penthouse Magazine, falsely
representing them to be pictures of Anna when they were in reality photographs
of someone else. The Action also alleges that the Company advertised its
intention to make the photographs and a video of the woman available on its
Internet Site on May 10, 2002. The photographs referred to in this Action are
the same photographs as those referred to in the action described in the
preceding paragraph. On May 7, 2002, the Company issued a press release stating
that it had made an unintentional error when it said the photographs were of
Anna and it apologized to Anna and the actual woman in the photographs for the
error. The Company also published the apology on its Internet Site.
Anna seeks a permanent injunction barring the Company from any similar acts
concerning her, barring it from any further distribution of the photographs and
the June 2002 edition of the Magazine, barring it from any references to Anna on
its Internet Site, barring it from representing that any pictures or photographs
on the Internet Site are depictions of Anna, ordering it to deliver or destroy
all materials that have the alleged false
35
representations, ordering the disgorgement and paying over of all profits it
earned and any other unjust enrichment that it received from the alleged false
depiction of Anna, awarding damages in an unspecified amount not less than $10.0
million, trebling of these unspecified damages, awarding punitive damages in an
unspecified amount and reimbursement for Anna's costs and attorneys' fees in
prosecuting the Action. The Company has filed a motion to dismiss portions of
the complaint and Anna has filed a cross-motion to freeze $15.0 million of the
Company's assets for purposes of insuring the payment of a possible judgement,
which were both heard in the California Court on August 5, 2002. On August 9,
2002, the California Court dismissed Anna's cross-motion. The Company is waiting
for the decision of the California Court with respect to its motion. The Company
intends to vigorously defend itself in this action. It is still too early to
determine the possible outcome of the proceedings. Therefore management cannot
give an opinion as to the effect this Action will have on the Company's
financial condition or results of operations. There can be no assurance,
however, that the ultimate liability from these proceedings will not have a
material adverse effect on its financial condition and results of operations.
On May 24, 2002, Reed Somberg and Liuz Gonzalez individually and on behalf of
all others similarly situated (the "Class Action Plaintiffs") filed in the
Circuit Court of Florida, 11th Judicial Circuit for Miami/Dade County, an action
alleging that the Company committed a "breach of duty" when it published
photographs of a woman topless in the June 2002 issue of Penthouse Magazine,
falsely representing them to be pictures of Anna Kournikova when they were
in reality photographs of someone else. The Class Action Plaintiffs claim they
bought the Magazine prior to learning that the authenticity of the photographs
was in question for the sole purpose of looking at these photographs. The action
requests class-action certification, a refund of the price of the Magazine,
compensation for "lost value" of the Magazine, court costs and interest. On July
22, 2002, the Company filed a motion to dismiss the action and is waiting for a
response from the Class Action Plaintiffs' legal counsel. The Company intends to
vigorously defend itself in this action. It is still too early to determine the
possible outcome of the proceedings. Therefore management cannot give an opinion
as to the effect this Action will have on the Company's financial condition or
results of operations. There can be no assurance, however, that the ultimate
liability from these proceedings will not have a material adverse effect on its
financial condition and 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 8, 2002, the Company and the Holders entered into an agreement to amend
the "Change of Control" events in the Indenture. The Company and the Holders
are entering into a Third Supplemental Indenture dated August 1, 2002 to
amend the "Change of Control" events to add further restrictions on the
amount of "Owner Payments", to substitute John Orlando for John Prebich in the
"Change of Control" provision and to add new financial covenants that require
the Company to achieve not less than 80% of the projected revenues and EBITDA
to be set forth in a business plan that shall be delivered to the Holders no
later then September 13, 2002. In addition the Company agreed to allow the
Holders to audit the books and records of the Company and the payroll records
of GMI and to pay all the legal fees, costs and expenses and audit fees of the
Holders (collectively the "Amendment Expenses) related to the agreement. The
Company recorded $114,000 of Amendment Expenses during the six months ended
June 30, 2002. In July 2002, the Company also paid $100,000 to the Holders as a
deposit against Amendment Expenses expected to be incurred by the Holders in
completing the amendment to the Indenture. In exchange for these amendments the
Holders agreed to waive
36
their complaint that a "Change of Control" had occurred.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed in the "Exhibit Index" are filed as part of
this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June
30, 2002.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
General Media, Inc.
(Registrant)
Dated: August 14, 2002 By: /s/ John D. Orlando
------------------------------------
Signature
John D. Orlando
President - Chief Operating Officer
(Duly Authorized Officer and
Principal Accounting Officer)
38
Exhibit Index
Exhibit No. Description
- ----------- -----------
10.18 - Third Supplemental Indenture, dated as of August 1, 2002,
among the Company, each of the Subsidiary Guarantors and The
Bank Of New York , as trustee.
99.1 - Certification Of Robert C. Guccione, Chief Executive
Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 - Certification Of John D. Orlando, Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
39