-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CKKTNrA4dqGICSNb3eh5rts2ks11K23EkDNkGMM2efNHPnZ2mgFGw5ilQw43xbfq sqrimqp1daGTCK1wlPTrhg== 0000950123-02-003113.txt : 20020415 0000950123-02-003113.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003113 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MEDIA INC CENTRAL INDEX KEY: 0000920771 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 133750988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-76716 FILM NUMBER: 02591267 BUSINESS ADDRESS: STREET 1: 11 PENN PLAZA CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2127026000 10-K 1 y58770e10-k.txt GENERAL MEDIA, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER: 33-76716 GENERAL MEDIA, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3750988 ------------- ----------------------------- (State of incorporation) (IRS Employer Identification No.) 11 PENN PLAZA, NEW YORK, NY 10001. ----------------------------------- (Address of principal executive offices) (212) 702-6000 --------------------------- (Registrant's telephone number) --------------------------- SECURITIES REGISTERED PURSUANT TO SECTIONS 12(b) OR 12(g) OF THE ACT: NONE --------------------------- Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |N/A| The aggregate market value of the Registrant's common stock, par value $.01 per share, held by non-affiliates of the Registrant is estimated to be approximately $345,000. As of March 28, 2002, there were 477,401 shares outstanding of the Registrant's common stock, par value $.01 per share and 10,906 shares outstanding of the Registrant's Class A preferred stock, par value $.01 per share. --------------------------- GENERAL MEDIA, INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2001 TABLE OF CONTENTS
Page ---- PART I Item 1. BUSINESS....................................................... 3 Item 2. PROPERTIES..................................................... 11 Item 3. LEGAL PROCEEDINGS.............................................. 11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................ 12 PART II Item 5. MARKET FOR THE REGISTRANT'S EQUITY STOCK AND RELATED STOCKHOLDER MATTERS.................................... 12 Item 6. SELECTED FINANCIAL DATA........................................ 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................... 16 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................ 31 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 31 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .......................................... 32 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 32 Item 11. EXECUTIVE COMPENSATION......................................... 34 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 37 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 37 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................ 39 SIGNATURES..................................................... S-3
2 PART I ITEM 1. BUSINESS. IN GENERAL General Media, Inc. ("General Media"), together with its subsidiaries (General Media and its subsidiaries are collectively referred to as the "Company"), is a publishing, online and entertainment company engaged in the publication and sale of men's magazines, the sale of various adult-oriented online products and services, the sale of various adult-oriented entertainment products and services, and the licensing of its trademarks to publishers in foreign countries and for use on various consumer products and services. Until March 2, 1999, it was also engaged in the publishing and sale of automotive magazines and an automotive television series. The automotive magazines were sold on March 2, 1999. In December 1999, the Company launched a new magazine, Mind & Muscle Power ("Power") targeting the men's health magazine market. Results were below expectations and the publication was suspended after the November 2000 issue. General Media International, Inc. ("GMI") owns 99.5% of the common stock of the Company. GMI, together with its subsidiaries other than the Company (such subsidiaries are collectively referred to as the "Other GMI Subsidiaries"), engages in operations that are organized into the Real Estate Group (which owns various properties and real estate holdings), and the Fine Arts Group (which buys, sells and holds for sale a substantial inventory of works of art). GMI formed General Media, a Delaware corporation, in November 1993 to implement a new operating and financing plan, which included (i) the transfer to General Media of the stock of certain subsidiaries that formed a portion of the publishing and the entertainment segments of GMI and (ii) the private offering of senior debt securities and common stock purchase warrants (the "Private Offering"). See "Market for the Registrant's Equity Stock and Related Stockholder Matters." Such plan enabled GMI to, among other things, direct resources to certain subsidiaries within its publishing and entertainment segments and improve operational and financial flexibility by replacing short-term debt with fixed-rate, long-term debt. On March 29, 2001 (the "Closing Date") the Company refinanced the senior debt securities and common stock warrants. Under a refinancing agreement, the Company exchanged $51.5 million principal amount of senior debt securities and any warrants held by exchanging noteholders (the "Consenting Holders") for new notes (the "Series C Notes") and preferred stock meeting certain specified terms and conditions. The remaining $0.5 million of principal amount of senior debt securities that were not exchanged were retired by payments made to the holders on March 29, 2001. Any remaining warrants were exercised or expired. 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 ranging from a total of $3.7 million during the first year following the Closing Date to a total of $6.5 million in the second year following the Closing Date and $4.6 million in the first three quarters of the third year following the Closing Date. In addition, further amortization equal to 50% of excess cash flow in each year is required. The Company has pledged substantially all of its assets as collateral for the Series C Notes. The preferred stock issued to exchanging Noteholders carries an initial liquidation preference of $10 million, provides for "paid-in-kind" dividends at a 13% per annum rate and is convertible, after 2 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 the end of the fifth year. The preferred stock may be optionally 3 redeemed by the Company at a discount during the first and second years following the Closing Date, at redemption prices of $6 million if redeemed in the first year and $10 million in the second year, and may be optionally redeemed at increasing premiums during the third, fourth and fifth years, provided that the Series C Notes are paid in full at or before the time of any redemption. 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 (five before January 2000) affiliate magazines (the "Affiliate Publications" and together with Penthouse magazine, the "Mens Magazines"), the licensing of the Company's trademarks, until March 1999, the publication of four specialty automotive magazines and, until October 2000, the publication of Mind and Muscle Power ("Power") magazine. 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, starting in 2001, the sale of adult-oriented consumer products through the Company's online store. The entertainment segment of the Company provides 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. The net revenues, income from continuing operations and identifiable assets attributable to each of the Company's industry segments are presented in Note 13 of the Notes TO Consolidated Financial Statements included in Part IV, Item 14. PRODUCTS AND SERVICES - PUBLISHING SEGMENT PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS Penthouse magazine was founded by Robert Guccione, who first published the magazine in London in 1965 and in the United States in 1969. Penthouse magazine offers its readers a combination of photography, investigative journalism, fiction, illustration, humor, politics, art and business. To capitalize on the name recognition of Penthouse magazine, the Company established five Affiliate Publications. Each of the Affiliate Publications is further described below. Forum: A monthly publication in digest form that includes adult information, advice and entertainment provided by authors, journalists and medical and legal experts. The magazine is published domestically and licensed in Europe and Australia. In addition, the Company publishes several special digest issues of Forum each year. Forum is sold at newsstands and through subscriptions. Variations: A monthly publication in digest form that features articles detailing the latest trends in adult entertainment. In addition, the Company publishes several special digest issues of Variations each year. Variations is sold at newsstands and through subscriptions. The Girls of Penthouse: A bi-monthly full-sized publication featuring photographs of the most popular models who have appeared in Penthouse magazine. The Girls of Penthouse is sold at newsstands and through subscriptions. Penthouse Letters: A monthly full-sized publication featuring letters written by readers describing their erotic experiences and fantasies. Penthouse Letters is sold at newsstands and through subscriptions. 4 Hot Talk: A bi-monthly full-sized publication that featured adult entertainment articles and letters describing erotic telephone conversations. In December 1999, the Company discontinued publication of Hot Talk. Circulation. In 2001, Penthouse magazine had a domestic average monthly circulation of approximately 652,000 copies and the Affiliate Publications had a combined domestic average monthly circulation of approximately 397,000 copies. The table below presents domestic average monthly circulation figures for Penthouse magazine and the Affiliate Publications for the years ended December 31, 1997 through 2001. PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS DOMESTIC AVERAGE MONTHLY CIRCULATION (COPIES IN THOUSANDS)
Penthouse Magazine Affiliate Publications ------------------------------------- ---------------------------------- Total Year Ended Domestic December 31, Newsstand Subscription Total Newsstand Subscription Total Circulation - ------------ --------- ------------ ----- ---------- ------------ ----- ----------- 1997.... 533 379 912 554 50 604 1,516 1998.... 578 438 1,016 475 50 525 1,541 1999.... 552 405 957 391 49 440 1,397 2000.... 490 289 779 364 52 416 1,195 2001.... 389 263 652 334 63 397 1,049
Penthouse magazine and the Affiliate Publications are primarily sold through newsstand distribution by convenience stores, bookstores and newsstands. Approximately 48% of Penthouse's newsstand sales are derived from convenience stores, 15% are from bookstores and 12% are from newsstand distribution channels. Newsstand copies sold as a percentage of total copies sold of Penthouse magazine and the Affiliate Publications were approximately 69% for the year ended December 31, 2001. The number of magazine copies sold on newsstands varies monthly, depending on, among other things, the cover, pictorials and editorial content. Approximately 16% of total newsstand copies are sold internationally. Newsstand revenues for Penthouse magazine and the Affiliate Publications were $33.8 million, $39.6 million and $38.1 million for the years ended December 31, 2001, 2000 and 1999, respectively, representing approximately 52% of the Company's net revenues for these periods, respectively, after excluding net revenues attributable to the Automotive Magazines. In recent years, domestic newsstand circulation for men's magazines has been declining. From 1997 to 2001, Penthouse magazine and the Affiliate Publications domestic average monthly newsstand circulation decreased by 33%. The Company believes that the loss of several newsstand distribution outlets due to the change in social climate toward men's magazines, together with certain advances in electronic technology, including the proliferation of retail video outlets and the increased market share of cable television and the internet, as well as ongoing consolidations of companies in the magazine distribution industry have largely contributed to the overall decrease in circulation. This decrease in domestic average monthly circulation for Penthouse magazine and the Affiliate Publications has been partially offset, however, by the Company's ability to maintain consistent cover price 5 increases and the recapture of certain convenience store distribution channels. Penthouse magazine, for example, has steadily increased its cover price from $7.99 per issue for three issues, $6.99 per issue for three issues and $5.99 per issue for six issues in 1999 to $8.99 per issue for four issues and $7.99 per issue for eight issues in 2001. The Company regularly price tests its magazines and adjusts cover prices accordingly. While newsstand circulation is the Company's principal means of distribution for Penthouse magazine and the Affiliate Publications, the Company has sought to increase their subscription circulation. The price of a twelve month subscription to Penthouse magazine ranged from $39.95 to $46.00 in 2001, depending upon the source of the subscription. The Company attracts new subscribers to its magazines primarily through its own direct mail advertising campaigns, and through subscription agent campaigns. The Company recognizes revenues from its magazine subscriptions over the term of the subscriptions. Subscription revenues for Penthouse magazine and the Affiliate Publications were $7.3 million, $6.9 million and $7.0 million for the years ended December 31, 2001, 2000 and 1999, respectively, representing approximately 11%, 9% and 9% of the Company's net revenues for these periods, after excluding net revenues attributable to the Automotive Magazines. Advertising. Penthouse magazine and the Affiliate Publications are relatively less dependent on advertising revenues than many other magazines, as approximately 67% of their respective revenues are generated from newsstand sales, while approximately 15% are generated from subscription sales and approximately 16% are generated from advertising. Advertising revenues for Penthouse magazine and the Affiliate Publications were $8.3 million, $8.8 million and $9.4 million for the years ended December 31, 2001, 2000 and 1999, representing approximately 13%, 12% and 13% of the Company's net revenues for these periods, respectively, after excluding net revenues attributable to the Automotive Magazines. In 2001, Penthouse magazine's advertising pages increased by 9% from the prior year, while advertising revenues decreased by 6% from 2000. This decrease was primarily due to less pay-per-call advertising in 2001. In 2000, Penthouse magazine's advertising pages decreased by 10% from the prior year while advertising revenues decreased by 0.5% from 1999. Penthouse magazine also includes advertising for the Company's products, primarily its own pay-per-call telephone lines, DVD's, video cassettes, internet products and pay-per-view programming. The Food and Drug Administration (the "FDA") issued regulations in August 1996 which prohibits the publication of tobacco advertisements containing drawings, color or pictures. The regulation does not apply to a magazine which is demonstrated to be an "adult publication". An adult publication is one (i) whose readers younger than 18 years of age constitute no more than 15% of total readership, and (ii) is read by fewer than two million persons younger than 18 years of age, in each case as measured by competent and reliable survey evidence. The Company restricts the sale of its magazine to persons 18 years of age or older. It believes that its magazines qualify as adult publications and that the regulations do not apply to them. In April 1997, the Federal District Court for the Middle District of North Carolina struck down the regulations on the grounds that although the FDA could regulate nicotine it had not been granted the power to regulate advertising. On appeal, the Fourth U.S. Circuit Court of Appeals struck all the legislation on the grounds that the FDA lacked the authority to regulate tobacco products at all. The decision was upheld by the U.S. Supreme Court in March 2000. 6 FOREIGN EDITION LICENSING The Company has sought to expand its readership through foreign edition licensing arrangements pursuant to which the Company licenses the Penthouse brand name and trademarks to publishers in foreign countries. Licensees typically use pictorials from the Company's library and provide their own editorial content to create the foreign editions. The Company, however, oversees the finished product to insure quality control and to maintain the spirit of the domestic edition. Under current licensing arrangements, the Company generally receives a one-time up-front fee and a royalty based upon a percentage of both circulation and advertising revenues, subject to certain minimum payments. In 2001, the Company received revenues from licensing agreements with publishers in Australia, Brazil , Croatia, Czech Republic, France, Germany, Greece, Holland, Hong Kong, Japan, Korea, Spain, Taiwan, Thailand and the United Kingdom. Revenues from licensing of foreign editions were $2.1 million, $2.1 million and $2.0 million for the years ended December 31, 2001, 2000 and 1999, respectively, representing approximately 3% of the Company's net revenues for these periods, respectively, after excluding net revenues attributable to the Automotive Magazines. AUTOMOTIVE MAGAZINES The Company published four domestic automotive titles (the "Automotive Magazines") until March 1999, that had a combined average monthly circulation of approximately 749,000 copies. These titles were Four Wheeler, Stock Car Racing, Open Wheel and Drag Racing Monthly. Revenues for the Automotive Magazines were $4.9 million for the year ended December 31, 1999, representing 6% of the Company's net revenues for this period. MEN'S HEALTH & FITNESS In December 1999, the Company launched a new magazine entitled Mind & Muscle Power ("Power"). Results were below expectations and the publication was suspended after the November 2000 issue. Revenues for Power were $1.2 million and $0.2 million for the years ended December 31, 2000 and 1999, respectively, representing 1.6% and 0.2% of the Company's net revenues for these periods. PRODUCTION, PRINTING, NEWSSTAND DISTRIBUTION AND SUBSCRIPTION FULFILLMENT The Company employs a staff of professionals to oversee the production, printing, distribution and fulfillment of its magazines. Through the use of state-of-the-art production equipment, economies of scale in printing contracts and efficiencies in subscription solicitation and fulfillment, the Company is able to efficiently publish and distribute all of its publications. The Company's systems for both graphics and editing are also state-of-the-art, utilizing the services of only ten employees. Up until November 2001, the Company's magazines, with the exception of Forum and Variations, were printed by R. R. Donnelley Corporation ("Donnelley") pursuant to several agreements (the "Agreements") which, after giving effect to an extension and amendment dated July 1997, were to expire in December 2003. In October 2001, Donnelley released the Company from the Agreements when it made the decision to close the printing plants that printed the magazines. Pursuant to an agreement dated October 12, 2001, the Company began using 7 Quebecor World to print these magazines effective for magazines printed starting in December 2001. In 2000, Forum and Variations were printed by Access Printing and in 2001 Forum and Variations were printed by Transcontinental Impression. Should the Company wish to change printers, it believes that other printers of similar quality could be engaged. The newsstand distribution of the Company's magazines is handled by Curtis Circulation Company ("Curtis Circulation") pursuant to an agreement that expires in November 2005 or upon prior notice by either the Company or Curtis Circulation. Curtis Circulation distributes the Company's publications through a network of approximately 225 marketing representatives to independent wholesalers, as well as to other channels of distribution. Curtis Circulation also provides the Company with other services, including management information and promotional and specialty marketing services. The Company receives a cash advance from Curtis Circulation at the time each issue is released for sale. The Company recognizes revenue from newsstand sales based on its estimate of copy sales at such time as the issue is released for sale and adjusts the estimate periodically based upon actual sales information. Each issue is settled with Curtis Circulation one hundred and eighty days after the off-sale date based upon the number of magazines actually sold, compared to the estimated number of copies sold that Curtis Circulation used to determine its cash advance. Effective July 1, 1999, Curtis Circulation exercised its option to assume the international newsstand distribution of the Company's magazines. Accordingly, the Company terminated its international distribution agreement with Worldwide Media Services, Inc. in accordance with the terms of that agreement. The consolidation of its distribution under Curtis Circulation has helped to streamline the Company's operations and has been beneficial to the Company. The Company's subscription fulfillment is currently provided by Palm Coast Data Service, Inc. ("PCD"). PCD performs the following services: receiving, verifying, balancing and depositing payments from subscribers and agents; maintaining master files on all subscribers and agents by magazine; issuing bills to subscribers and agents and sending renewal notices to subscribers; issuing labels; packaging and mailing magazines as directed by the Company; and furnishing various reports to monitor all aspects of the subscription operations. Subscription copies of the magazines are delivered through the U.S. Postal Service as second class mail. The Company experienced a general postal rate increase of 6% in January 1999, 9.9% in January 2001 and 2.6% in July 2001. A postal rate increase of 11.6% will go into effect in July 2002. ONLINE SEGMENT In August 1995, the Company launched a pay service, Penthousemag.com, on the Internet. Customers are sold a membership ranging from 2 days to one year, at prices ranging from $9.99 to $120.00. Revenues received from the sale of memberships to the Company's Internet Site are recognized over the term of the membership. The membership gives the customer access to adult-oriented photographs, video feeds and chat rooms via a personal identification number that expires according to the membership period selected. Memberships are billed to the customers' credit card in accordance with the Federal Communications Commission's safe harbor provision. The Company also hosts several other third party Internet sites that also provide adult-oriented entertainment. Under these agreements, the Company provides a banner on its Internet Site as well as hosting and billing services for these third party providers who are responsible for the content and maintenance of their site. In return the Company receives a portion of the paid membership fees to these sites in accordance with the agreements. In January 2000 the Company also began selling advertising banners on its Internet Site. Net revenues from the internet for the years ended December 31, 2001, 2000 and 1999 were $9.8 8 million, $12.8 million and $12.8 million, respectively, representing 15%, 17% and 17% of the company's net revenues for these periods, respectively, after excluding net revenues attributable to the Automotive Magazines. PRODUCTS AND SERVICES - ENTERTAINMENT SEGMENT The Company's entertainment segment produces and distributes adult-oriented entertainment products, including pay-per-call telephone lines, DVD's, video cassettes and pay-per-view programming. Revenues of the entertainment segment were $2.9 million, $3.3 million and $3.8 million for the years ended December 31, 2001, 2000 and 1999, respectively, representing 4%, 4% and 5% of the Company's net revenues for these periods, respectively, after excluding net revenues attributable to the Automotive Magazines. The Company provides adult-oriented entertainment through pay-per-call telephone lines which feature both recorded audio programs and live operators on 900 and 800 number telephone lines. The Company's recorded audio programs are created and broadcast by independent service bureaus. The operators on the live telephone lines are employed by the service bureaus and are not employees of the Company. The Company's 900 number telephone lines are romantic in nature and feature programs where users can listen to computerized conversations, speak with live operators and participate in live one-on-one talk, dating and chat lines. The 900 number telephone calls are billed directly to the caller's telephone number and typically cost between $3.95 and $4.95 per minute. The Company's 800 number telephone lines are explicit and uncensored in nature and include certain live Penthouse party lines and live one-on-one talk, dating and chat lines and typically cost $4.95 per minute. The 800 number telephone calls are billed to credit cards in accordance with the Federal Communications Commission safe harbor provisions, which require that such telephone calls be billed to credit cards to insure that calls are not made by minors. The Company develops, produces and distributes products for the domestic and international home video and pay-per-view markets. Since 1990, the Company has produced 89 videos, which were released for domestic distribution through Warner Home Video, a subsidiary of Time Warner, Inc. up to June 1999. In June 1999, the Company entered into an agreement with Image Entertainment, whereby the Company licensed the domestic distribution of its catalog titles on DVD for a non-recoupable up-front license fee of $0.9 million and a royalty fee based on the number of units sold. The Company is amortizing the up-front licensing fee over the term of the contract. In June 1999 the Company also entered into an agreement with Image Entertainment, whereby the Company licensed the domestic distribution of its full length feature film, Caligula, on DVD for a recoupable up-front license fee of $0.1 million against a royalty fee based on the number of units sold thereafter. The upfront license fee under this agreement was fully recouped during the year 2000 and the Company is continuing to earn royalties over and above the up-front license fee. In July 2000 the Company entered into an agreement with Image Entertainment whereby the Company licensed the foreign distribution of its video cassettes and DVD's for a recoupable up-front license fee of $0.5 million against a royalty fee based on the number of units sold thereafter. The up-front license fee under this agreement was fully recouped during 2001 and the Company is continuing to earn royalties over and above the up-front license fee. The video cassettes and DVD's are also offered for sale through the Penthouse store on the Company's internet site and are advertised in the Company's magazines. These videos are generally approximately 60 minutes in length, have a level of explicitness greater than "R" and feature Penthouse centerfold models. Many of the Company's videos are also sold internationally through licensing arrangements. In 1999, the Company entered into agreements with BET Action PPV, HBO, Viewer's Choice and various smaller independent pay-per-view channels. Revenues received from these agreements based on the number of pay-per-view purchases and fixed amounts per program and were $0.1 million, $0.2 million and $0.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. 9 SOURCES AND AVAILABILITY OF RAW MATERIALS Paper is the primary raw material used in the production of the Company's magazines. The Company uses a variety of high quality coated and uncoated paper that is purchased from a number of suppliers. The Company believes that there are several alternative suppliers in the event of its inability to purchase from its present suppliers. TRADEMARKS The Company's trademarks are essential to the Company's current business operations and future expansion. The trademarks, which are renewable indefinitely, include Penthouse, Forum, Variations, Penthouse Letters, Girls of Penthouse, Mind & Muscle Power, Hot Talk, Penthouse Comix and Penthouse Max. SEASONALITY The Company's business is generally not seasonal in nature. Issues of Penthouse magazine with female celebrity covers or pictorials, however, have historically resulted in higher newsstand sales than non-celebrity issues. Sales of the Company's video cassette products may vary based upon the timing of the release of new videos. DEPENDENCE ON CUSTOMERS No customer of the Company accounted for more than ten percent of the Company's net revenues in 2001, 2000 or 1999, and no part of the business is dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on the Company. However, one advertising agency placed $2.0 million, $2.3 million and $2.2 million in advertising revenues in Penthouse magazine and the Affiliate Publications in 2001, 2000 and 1999, respectively. These revenues represent 3% of the Company's net revenues in 2001, 2000 and 1999, respectively, after excluding net revenues attributable to the Automotive Magazines. COMPETITORS Magazine publishers face intense competition for both circulation and advertising revenues. The main competitors of Penthouse magazine and the Affiliate Publications are magazines that primarily target a male audience. Other types of media that carry advertising also compete for advertising with the Company's magazines. Competition in the internet business comes many different competitors. The Company's advantage in this area is the Penthouse trademark and the low cost of advertisement for its internet service in its own magazines. Few other magazine publishers have either more adult-oriented magazines or a comparable combined circulation for such magazines. Competition in the pay-per-call business is generally limited to a few major competitors. The Company's advantage in this area is the low cost of advertisement for such pay-per-call service in its own magazines. 10 EMPLOYEES As of March 28, 2002, the Company employed 107 full-time employees, none of whom are members of a union, and 6 part-time employees. ITEM 2. PROPERTIES. The Company's principal corporate offices for the publishing, online and entertainment segments are located in New York City at 11 Penn Plaza. The Company leases office space at various locations, as set forth below.
Approx. Lease Location Principal Use Sq. Ft. Expiration - -------- ------------- Occupied Date -------- ---------- 11 Penn Plaza, Principal Corporate, Publishing, 49,000 March 11, 2009 New York, New York Production and Sales Office Chicago, Illinois Sales Office 800 March 31, 2002 Los Angeles, California Sales Office 250 March 31, 2002
The Company has a ten-year and seven month lease for its principal corporate offices which commenced on August 11, 1998 and requires annual lease payments of $1.7 million until December 31, 2001 and thereafter of $1.9 million until the expiration of lease. The Company believes that its principal corporate offices are suitable and adequate for its current business operations and that, upon expiration of the lease, it will be able to obtain similarly suitable and adequate office space in Manhattan at a competitive price. The Company also uses a 17,000 square foot townhouse located in New York City (the "Townhouse"), owned by GMI and Robert C. Guccione, for Company related activities, including business meetings and promotional and marketing events. Pursuant to a Properties and Salary Allocation Agreement among the Company, GMI and a GMI subsidiary (the "Properties and Salary Allocation Agreement"), the Company reimbursed GMI approximately $0.6 million, $0.5 million and $0.5 million in 2001, 2000 and 1999 respectively for the use of such property. See "Certain Relationships and Related Transactions." ITEM 3. LEGAL PROCEEDINGS. The Internal Revenue Service has completed an audit of GMI's Federal income tax returns for 1986 through 1990. The audit resulted in a tax deficiency totaling $35,000 plus interest, which was paid in October 1999. As a result of the audit, the net operating loss carryforward was reduced by $95,600. GMI's Combined New York State Franchise Tax Returns for the years 1993 through 1996 are in the process of being audited by The New York State Department of Taxation and Finance. The Companys' management does not expect a material adverse outcome from this audit. Subsequent years' Federal, New York State and other tax returns filed by GMI are subject to audit by governmental authorities. Under the terms of a Tax Sharing and Indemnification Agreement among the Company, GMI and the Other GMI Subsidiaries (the "Tax Sharing Agreement"), GMI and the Other GMI Subsidiaries will be liable for any payments due as a result of these audits through fiscal 1993. 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. 11 On January 23, 1997, the Company filed in United States District Court for the Southern District of New York an action under the Racketeer Influenced and Corrupt Organizations Act alleging, among other things, that certain defendants conspired to defraud the Company by fraudulently backdating a contract (the "DEC Contract") which awarded exclusive rights to develop a "live" Penthouse internet site to defendant Deluxe Entertainment Corp. ("DEC"). On January 24, 1997 DEC served a demand on the Company for arbitration under the DEC contract on the issues of breach and damages. The DEC Contract provides a minimum damage award of $30 million in addition to incidental, consequential and punitive damages and compensation for lost profits. In July 1998 the United States District Court granted DEC's motion for arbitration. DEC and the Company have mutually agreed to indefinitely postpone this arbitration subject to reinstatement by either party on six months notice to the other. The Company intends to vigorously defend itself in the arbitration should it be reinstated. In the opinion of management, the outcome of these proceedings is not reasonably likely to have a material adverse effect on the Company's financial condition or results of operations. 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 attorneys fees. The Defendants have until April 22, 2002 to file their answer to the complaint. However, the Court has ordered the case to mediation, which mediation is to be completed no later than June 17, 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 the opinion of management, the outcome of these proceedings is not reasonably likely to have a material adverse effect on the Company's financial condition or results of operations. The Company's subsidiaries are parties to various other pending legal proceedings arising in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, the Company believes that these proceedings are not reasonably likely to have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY STOCK AND RELATED STOCKHOLDER MATTERS. As of March 28, 2001, 475,000 shares of the Company's $.01 par value common stock (the "Common Stock") issued and outstanding were owned by one holder, GMI, and an additional 2,401 shares of Company's Common Stock were held by two former Warrant holders who converted common stock purchase warrants into Common Stock on December 22, 2000. There is no established public trading market for the Common Stock. Holders of shares of Common Stock are entitled to receive dividends out of funds legally available for payment thereof in such amounts per share as may be declared by the Company's Board of Directors, subject to 12 the restrictions contained in an Indenture (the "Indenture"), dated December 21, 1993, which was entered into by the Company and IBJ Whitehall Bank & Trust Company, as trustee, in connection with the issuance of Series A 10 5/8% Senior Secured Notes Due 2000 (the "Series A Notes") in the aggregate principal amount of $85 million in the Private Offering. Pursuant to the Indenture, that was extended and amended on March 29, 2001 in connection with an exchange of the Senior Secured Notes as more fully described below, the Company may not declare a dividend on the Common Stock, subject to certain exceptions, unless it meets certain financial covenants set forth therein. The Company's subsidiaries, however, are permitted to make inter-company dividends on their shares of common stock. The Company did not declare any dividend for the fiscal years ended December 31, 1999, 2000 or 2001. Pursuant to a Registration Rights Agreement, dated December 21, 1993, among the Company, Jefferies & Company, Inc. and Furman Selz Incorporated (the "Underwriters"), the Company consummated an exchange offer in July 1994 to exchange the Series A Notes for Series B 10 5/8% Senior Secured Notes Due 2000 (the "Series B Notes"), which were registered under the Securities Act of 1933. The Series B Notes were substantially identical to the Series A Notes (including principal amount, interest rate and maturity), except that the Series B Notes were freely transferable. The Company also issued in the Private Offering 187,506 common stock purchase warrants (the "Warrants") to purchase an aggregate of 25,000 shares of Common Stock (approximately 5% of the outstanding Common Stock) (the "Warrant Shares"). In July 1995 the Company repurchased 5,000 Warrants. On December 22, 2000, the holders of 18,009 Warrants exercised them, at an exercise price of $.01 per Warrant Share, for 2,401 shares of the Company's Common Stock. 104,076 Warrants expired without being timely exercised in accordance with the Warrant agreement. The due date of the remaining 60,421 Warrants, which were held by the holders of the Series B Notes, was extended as part of the negotiations for the refinancing of the Notes. On March 29, 2001 (the "Closing Date") the Company refinanced the Series B Notes and Warrants. Under the refinancing agreement, pursuant to the exemption from registration contained in Section 3(a) (9) of the Securities Act of 1933, the Company exchanged $51.5 million of principal amount of Series B Notes and any Warrants held by Consenting Holders for new notes (the "Series C Notes") and preferred stock meeting certain specified terms and conditions. The remaining $0.5 million of principal amount of senior debt securities 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 ranging from a total of $3.7 million during the first year following the Closing Date to a total of $6.5 million in the second year following the Closing Date and $4.6 million in the first three quarters of the third year following the Closing Date. In addition, further amortization equal to 50% of excess cash flow in each year is required. The Company has pledged substantially all of its assets as collateral for the Series C Notes. The Indenture was amended to reflect the above mentioned payments and to reflect the March 29, 2004 maturity of the Series C Notes. The 9,905 shares of preferred stock issued to exchanging Noteholders carries an initial liquidation preference of $10 million, provides for "paid-in-kind" dividends at a 13% per annum rate and is convertible, after 2 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 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 $6 million if redeemed in the first year and $10 million in the second year, and may be 13 optionally redeemed at increasing premiums during the third, fourth and fifth years, provided that the Series C Notes are paid in full at or before the time of any redemption. There is no established public trading market for the Series C Notes, the Company's common stock or its preferred stock. The Company does not intend to list the Series C Notes or its equity securities on any securities exchange. 14 ITEM 6. SELECTED FINANCIAL DATA (a).
Year Ended December 31, ------------------------------------------------ (In millions) 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- OPERATING DATA: Net revenue $103.8 $105.1 $78.8 $76.0 $65.4 Operating income (loss) 7.4 5.5 (0.8) 11.8 7.3 Debt restructuring expenses 9.6 Interest expense, net 9.3 9.4 7.2 6.4 7.7 Gain on sale of Automotive Magazines - - 30.7 - - Income (loss) before extraordinary item (1.9) (3.9) 19.2 3.2 (9.9) Extraordinary gain from extinguishment of debt, net of income taxes of $15 in 1999 and $465 in 2000 0.7 0.6 Net income (loss) (1.9) (3.9) 19.9 3.8 (9.9) OTHER DATA: Depreciation and amortization $1.9 $1.8 $0.9 $0.7 $0.6 Capital expenditures 0.3 2.8 0.6 0.2 0.1 Ratio of earnings to fixed charges (b) (b) 3.5 1.7 (b) BALANCE SHEET DATA: Total assets $42.6 $41.9 $30.3 $32.8 $25.8 Current maturities of senior debt securities - - 51.8 2.9 5.8 Senior debt securities, less current maturities 79.5 79.6 - 49.1 43.3 Manditorily redeemable convertible preferred stock 9.5 Total stockholders' deficiency (73.8) (78.1) (56.7) (52.7) (63.9)
15 (a) Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. (b) For the years ended December 31, 1997, 1998 and 2001, earnings were insufficient to cover fixed charges by $2,526,000, $4,396,000 and $10,255,000, respectively. For a more detailed description of the Company's financial position, results of operations and accounting policies, please refer to Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II. Item 8. "Financial Statements and Supplementary Data." ITEM 7. 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 included in Note 1 of the Notes To Consolidated Financial Statements. 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 $1,000,000 and $3,000,000 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 $900,000 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. 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 selling expense on the on- 16 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. Accrued retail display allowances at December 31, 2000 and 2001 were $2,365,000 and $1,407,000, respectively. 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 bases 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 net 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 the fiscal years beginning after December 31, 2001. The supercedes SAFS 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 statements. The Company does not believe that this statement will have a material effect on the Company's financial statements. Certain provisions of The Emerging Issues Task Force pronouncement EIFT 01-9, " Accounting for Considering 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 Company is evaluating the impact that this pronouncement will have on the Company's financial statements as it relates to retail display allowances. CONTRACTUAL OBLIGUATIONS AND COMMERCIAL COMMITMENTS The Company does not utilize off the balance sheet financing other than operating lease arrangements for office premises and related equiptment. The following table summarizes all commitments under contractual obligations as of December 31, 2001: ---------------Obligations due------------- Total 1 2-3 4-5 Over 5 Amounts Year Years Years Years ---------------(In millions)--------------- Senior Secured Notes $49.1 $5.8 $43.3 $ - $ - Operating Leases 13.6 1.9 3.7 3.8 4.3 Other Long-Term Liabilities 1.0 0.2 0.5 0.2 - ----- ---- ----- ---- ---- Total Cash Obligations $63.7 $7.9 $47.5 $4.0 $4.3 ===== ===== ===== ===== ====== Interest On Senior Secured Notes $14.5 $7.0 $7.5 $ - $ - ===== ===== ===== ===== ====== LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, the Company had $2.4 million in cash and cash equivalents, compared to $6.4 million at December 31, 2000. During the year ended December 31, 2001, the Company provided $4.1 million in cash flows from operating activities. However the Company paid $3.2 million in advances to an affiliated company, incurred $2.0 million in debt issuance costs and paid $2.9 million in mandatory principal payments for its Series C Notes, resulting in a net decrease in its cash balance at December 31, 2001. At December 31, 2001, the Company's current liabilities exceeded current assets by $22,331,000. The Company's Series C Notes require interest payments of approximately $7.0 million and amortization payments of $5.8 million during the next year. The management of the Company does not believe it can generate sufficient funds from operations to make all of the 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 currently in discussions with holders of the Series C Notes for a reduction in the amount of the debt service payments. There can be no assurance that the Company will be successful in obtaining a reduction in the debt service payments. The Company has undertaken the following actions to attempt to achieve profitability and improve cash flow: - 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 $2.5 million on an annualized basis. 17 - Reduce production costs of its magazines by changing the paper grades on its magazines and by changing their design to improve production efficiencies, thereby saving an estimated $0.5 million in cash during 2002 and an estimated $0.8 million on an annualized basis. - Reduce the amount of cash expended to promote subscriptions of the Affiliate Publications and reduce 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. - Improve revenue by adding additional special issues of its magazines. Based on past experience, this action is expected to generate an estimated $0.1 million in additional cash during 2002. 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 provided by operating activities was $4.1 million for both the years ended December 31, 2001 and 2000. Net cash provided by operating activities for the year ended December 31, 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 lower paper inventory levels. This was partially offset by increased spending on subscription acquisition drives and increased payments of interest on the Notes during the year ended December 31, 2001. The net cash provided by operating activities for the year ended December 31, 2000 was primarily the result of income from operations for the period after adjusting for the effect of non-cash items, the timing of advance payments from the Company's newsstand distributor and improved collections of accounts receivable. This was partially offset by decreased accounts payable and accrued expenses due to the timing of payments to vendors and higher paper inventory levels. The increased purchase of paper in 2000 was made to take advantage of discounted prices and favorable credit terms offered by one of the Company's paper suppliers. Cash flows from investing activities Cash used in investing activities for the year ended December 31, 2001 was $0.1 million, compared to cash used in investing activities of $0.2 million for the year ended December 31, 2000. The cash used in investing activities for the years ended December 31, 2001 and 2000 was the result of capital expenditures made during the respective periods. Cash flows from financing activities Cash flows used in financing activities were $8.0 million for the year ended December 31, 2001, compared to cash flows used in financing activities of $3.1 million for the year ended December 31, 2000. Cash used in financing activities for the year ended December 31, 2001 was primarily the result of the payment of debt issuance costs of $2.0 million related to the refinancing of the Company's Series C Notes (See Notes 5 and 6 of the Notes To Consolidated Financial Statements), advances of $3.2 million to GMI during the year ended December 31, 2001 and the repayment of $2.9 million of principal amount of the Notes. Cash used in financing activities for the year ended December 31, 2000 was primarily the result of $2.9 million of advances to GMI during the period and debt issuance costs of $0.2 million related to the refinancing of the Company's Series C Notes. GMI repaid $4.5 million of advances during the year ended December 31, 2000 by a transfer of 100% of the outstanding stock of a subsidiary of GMI whose net assets consist of works of art and other 18 valuables which were appraised at $1.8 million and by the Company's utilization of $2.7 million 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 Consolidated Financial Statements). Affiliated company advances at December 31, 2001 increased $3.2 million from December 31, 2000. These balances regularly result from the impact of certain cost sharing and expense allocation agreements with GMI and its subsidiaries, whereby certain costs, such as shared corporate salaries and overhead, are paid by the Company and a portion charged to GMI and its subsidiaries as incurred. These charges generally result in amounts due to the Company, and are to be repaid sixty days after the end of each quarter in accordance with the terms of an expense sharing agreement. 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 has a loan receivable from the principal shareholder of GMI of $1.0 million. The loan is evidenced by a promissory note, bears interest at 11% per annum, and is payable on December 31, 2002. The ability of the Company to incur additional debt is severely limited by the terms of its Series C Notes and the Indenture. Pursuant to the Indenture, the Company may not declare a dividend on its common stock, subject to certain exceptions, unless it meets certain financial covenants set forth therein. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 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 (five before January 2000) affiliate magazines, the licensing of its trademarks to publishers in foreign countries and for use on various consumer products and services. The Company suspended publication of the Affiliate Publication Hot Talk in December 1999 due to the poor financial performance of the magazine and the Automotive Magazines were sold on March 2, 1999. In December 1999, the Company launched Power magazine which targeted the men's health magazine market. Results were below expectations and the publication was suspended after the November 2000 issue. 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, starting in 2001, 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 $65.4 million for the year ended December 31, 2001, compared to revenues of $76.0 million for the year ended December 31, 2000, a decrease of $10.6 million. Newsstand revenues were $33.8 million and $40.2 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $6.4 million. Of this decrease, $0.5 million is due to the suspension of publication of Power Magazine. Newsstand revenues from Mens Magazines were $33.8 million and $39.6 million for the year ended December 31, 2001 and 2000, respectively. Advertising revenues were $8.3 million and $9.5 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $1.2 million. Of this decrease, $0.7 million is due to the suspension of publication of Power Magazine. Advertising revenues from Mens Magazines were $8.3 million and $8.8 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $0.5 million. Subscription revenues were $7.3 million and $6.9 million for the year ended December 31, 2001 and 2000, respectively, an increase of $0.4 million. The increase in subscription revenues is attributable to Mens Magazines. Revenues for the online segment were $9.8 million and $12.8 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $3.0 million. Revenues for the Entertainment Segment were $2.9 million and 19 $3.3 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $0.4 million. Revenues from the Company's video business were $2.1 million and $2.2 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $0.1 million. Revenues from the Company's pay-per-call business were $0.7 million and $1.1 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $0.4 million. Income from operations was $7.3 million and $11.8 million for the year ended December 31, 2001 and 2000 respectively, a decrease of $4.5 million. Income from operations was impacted by: - - an increase in reserves for bad debts of $2.6 million consisting of reserves of approximately $1.9 million related to loans and advances to affiliated companies, approximately $0.4 million related to royalties receivable and approximately $0.3 million related to receivables from subscription agents, - - a decrease in the number of mens magazines sold, - - decreased revenues from the online and entertainment segments, - - an increase in revenue from two additional issues of Girls of Penthouse, - - an increase in the subscription price of Penthouse Magazine, - - decreased production costs and distribution costs as a result of a decrease in the number of newsstand copies printed and lower paper costs, - - decreased selling, general and administrative expenses due to decreased retail display allowance expense, salaries and benefits, bank charges, legal expenses and public relation expenses, partially offset by increased subscription acquisition expense, insurance expense and professional fees. Other income (expense) was $(17.3) million for the year ended December 31, 2001 compared to net other income (expense) of $(6.4) million for the year ended December 31, 2000. Included in other income (expense) for the year ended December 31, 2001 are debt restructuring expenses of $9.6 million related to the refinancing of the Company's Notes on March 29, 2001 (see Note 5 of the Notes To Consolidated Financial Statements). Other income (expense) also includes interest expense of $8.0 million for the year ended December 31, 2001, compared to interest expense of $6.9 million for the year ended December 31, 2000, an increase of $1.1 million. The increase is primarily due to an increase in the interest rate paid on the Company's Senior Secured Notes as a result of the refinancing of the Notes. The interest rate on the Series C Notes issued on March 29, 2001 is 15% compared to an interest rate of 10-5/8% on the Notes which were retired on that date. The new rate went into effect on January 1, 2001. Included in interest expense for the year ended December 31, 2000 are amortized debt issuance costs and discounts of $0.9 million. As a result of the above discussed factors, net loss before income tax expense (benefit) for the year ended December 31, 2001 was $10.0 million, compared to a net income of $5.5 million for the year ended December 31, 2000. 20 The net revenues and income from operations of the Company were (in millions):
Income (loss) Net Revenue from operations ------------- --------------- Year Ended Year Ended December 31, December 31, ------------- ------------- 2000 2001 2000 2001 ---- ---- ---- ---- Publishing Segment $59.9 $52.7 $14.4 $13.5 Online Segment 12.8 9.8 8.1 5.9 Entertainment Segment 3.3 2.9 1.8 1.2 ----- ----- ----- ----- $76.0 $65.4 $24.3 $20.6 Corporate Administrative Expenses (12.5) (13.3) ----- ----- ----- ----- $76.0 $65.4 $11.8 $7.3 ===== ===== ===== =====
PUBLISHING SEGMENT The net revenues and income from operations of the Publishing Segment were as follows (in millions):
Income (loss) Net Revenue from operations -------------- --------------- Year Ended Year Ended December 31, December 31, -------------- ------------- 2000 2001 2000 2001 ---- ---- ---- ---- Penthouse Magazine and the Affiliate Publications $56.6 $50.7 $13.5 $11.9 Foreign edition licensing 2.1 2.1 1.7 1.7 Power Magazine 1.2 (0.1) (0.8) (0.1) ----- ----- ----- ----- $59.9 $52.7 $14.4 $13.5 ===== ===== ===== =====
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS Revenues for Penthouse magazine and the Affiliate Publications were $50.7 million and $56.6 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $5.9 million. Newsstand revenue was $33.8 million and $39.6 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $5.8 million. The decrease is primarily attributable to a decrease in the number of copies of Penthouse magazine and the Affiliate Publications sold, partially offset by an increase in the cover price of Penthouse, Penthouse Letters and Variations magazines. Newsstand sales have been adversely affected by the weakness in the economy in 2001 and by the ongoing consolidations of companies within 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 was $8.3 million and $8.8 million for the years ended December 31, 2001 and 2000, respectively, a decrease of $0.5 million. The decrease in advertising revenue is primarily attributable to a decrease in the average rate per page of advertising pages sold in Penthouse magazine, partially offset by an increase in the number of advertising pages sold in this publication. Subscription revenue was $7.3 million and $6.9 million for the years ended December 31, 2001 and 2000, respectively, an increase of $0.4 million. The increase is due to an increase in the net revenue per copy sold of the Penthouse magazine, partially offset by a decrease in the number of subscription copies sold of Penthouse 21 magazine and the Affiliate Publications. In the third quarter of 1999, the Company increased the subscription price for Penthouse magazine and reduced discounts offered to its subscription agents to improve the profitability of subscriptions sold. This change has had the effect of increasing the net revenue per copy for subscriptions over the past nine quarters as old subscriptions expire and they are replaced by new subscriptions sold at the increased rate. This increase has been partially offset by a decrease in the number of subscription copies sold during the year ended December 31, 2001 as compared to the year ended December 31, 2000. Publishing-production, distribution and editorial expenses were $24.2 million and $28.2 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $4.0 million. Paper costs were $8.4 million and $11.3 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $2.9 million. Print costs were $8.7 million for the year ended December 31, 2001, compared to $9.5 million for the year ended December 31, 2000, a decrease of $0.8 million. The decreases are due primarily to a decrease in the number of copies printed, a decrease in the price of paper, and a decrease in the number of pages per issue, partially offset by paper and printing costs for two additional issues of Girls of Penthouse in 2001 and increased printing costs due to price increases for inflation contained in the Company's contracts with its printers. Distribution costs were $4.2 million for both the years ended December 31, 2001 and 2000. Editorial costs were $2.9 million and $3.3 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $0.4 million. Selling, general and administrative expenses were $14.5 million for the year ended December 31, 2001, compared to $14.7 million for the year ended December 31, 2000, a decrease of $0.2 million. The decrease is primarily due to a decrease in retail display allowance of $0.7 million and a decrease in salary and benefit expense of $1.0 million, partially offset by an increase in subscription costs of $1.1 million, consulting expenses of $0.1 million, fulfillment expenses of $0.1 million, other taxes of $0.1 million and newsstand rack expense of $0.1 million during the year ending December 31, 2001. Trends - Penthouse and the Affiliate Publications The Company has experienced a steady decline in the number of newsstand copies of Penthouse magazine and the Affiliate Publications sold over the past several years. From 1997 to 2001, Penthouse magazine and the Affiliate Publications domestic average monthly newsstand circulation decreased by 33%. The Company believes that the loss of several newsstand distribution outlets due to the change in social climate toward men's magazines, together with certain advances in electronic technology, including the proliferation of retail video outlets and the increased market share of cable television and the internet, as well as ongoing consolidations of companies in the magazine distribution industry, have largely contributed to the overall decrease in circulation. The Company has raised the cover prices of the magazines and reduced production costs to partially offset this decline. The Company believes that the most significant consolidations likely in the magazine distribution industry have already taken place. The Company also believes that newsstand sales will improve slightly during 2002, as a result of special marketing strategies it has implemented aimed at developing new outlets for its magazines and rewarding growth in sales by distributors and as a result of the economic recovery expected to occur during the second half of 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. 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 over the past several years, 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- 22 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 2002 as magazine circulation begins to increase for the reasons stated above and as the market for advertising improves as a result of the economic recovery expected in the second half of 2002. 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 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 foreseeable future and expects the number of subscription sales to remain fairly stable during 2002. However, the 11.6% increase in postal rates that will go 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 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. The Company expects printing costs to increase due to price increases for inflation contained in the Company's contracts with its printers. The Company projects that paper prices, which have been decreasing during 2001, will remain stable during 2002. However, paper prices are volatile and 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 $2.1 million for both the years ended December 31, 2001 and 2000, respectively. Selling, general and administrative expenses were $0.4 million for both the years ended December 31, 2001 and 2000. Trends - Foreign Edition Licensing Revenue from licensing of foreign editions has remained fairly stable over the past several years. While declining circulation at 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. 23 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. POWER MAGAZINE Publication of Power magazine was suspended after the November 2000 issue. Revenues for Power magazine were $1.2 million for the year ended December 31, 2000, consisting of newsstand revenues of $0.5 million and advertising revenues were $0.7 million, respectively. Publishing-production, distribution and editorial expenses were $1.3 million for the year ended December 31, 2000. Selling, general and administrative expenses were $0.7 million for the year ended December 31, 2000. ONLINE SEGMENT Revenues for the online segment were $9.8 million and $12.8 million for the years ended December 31, 2001 and 2000, respectively, a decrease of $3.0 million. The decrease is due to a decrease in the sale of memberships to the Internet Site of $3.4 million, partially offset by an increase in advertising revenues from banners in the Internet Site of $0.1 million and online store revenue of $0.3 million during the year ending December 31, 2001. The company experienced a decline in new members due to weakness in the U.S. economy during the year ended December 31, 2001 and due to its use of more aggressive credit card validation methods in order to comply with Visa's more stringent requirements regarding chargeback levels. To offset this decline the company has intensified its efforts to attract more advertisers to the Internet Site, which has resulted in increased advertising revenue during the year ended December 31, 2001 and has implemented more varied pricing plans to attract new members and retain existing members. Direct costs were $0.4 million for the year ended December 31, 2001 and $0.6 million for the year ended December 31, 2000, 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 year ended December 31, 2001. Selling general and administrative expenses were $3.5 million for the year ended December 31, 2001, compared to $4.1 million for the year ended December 31, 2000, a decrease of $0.6 million. The decrease is primarily attributable to lower bank charges of $0.8 million and decreased consulting fees of $0.2 million, partially offset by increased salaries and benefits of $0.4 million during the year ended December 31, 2001. Trends - Online Segment Revenues from the online segment leveled off in 2000 and then declined in 2001 primarily as a result of the use of more aggressive credit card validation methods required to comply with Visa's requirements, and the weakness in the U.S. economy during the year ended December 31, 2001. The Company does not believe it will need to intensify its validation methods any further in the near term to meet Visa's requirements and expects that 2002 revenue from the online segment will be slightly higher than those achieved in 2001. In addition, the marketing initiatives stated above and the anticipated economic recovery during the second half of 2002 are expected to help increase sales of memberships in 2002. 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. In addition, MasterCard and 24 Discover have not set maximum chargeback levels for their credit card transactions. If MasterCard or Discover decides to establish a maximum chargeback level, the Company may need to intensify its validation methods further to meet their requirements. The Company currently applies the same validation techniques to the credit card transactions of all three companies even though MasterCard and Discover have not established a maximum chargeback level. 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. Revenues from advertising banners in the Internet Site are expected to remain consistent with 2001 and revenue from the online store is expected to increase slightly in 2002 as more products are added to the store. Direct costs are expected to remain about the same during 2002. 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 $2.9 million for the year ended December 31, 2001, compared to $3.3 million for the year ended December 31, 2000, a decrease of $0.4 million. The Company's video business revenues were $2.1 million for the year ended December 31, 2001 compared to $2.2 million for the year ended December 31, 2000, a decrease of $0.1 million. Revenues for the year ended December 31, 2001 were lower because the company re-released many of its older movies on DVD format during the prior year causing sales to be higher during the prior period. Revenues from the Company's pay-per-call business were $0.7 million and $1.1 million for the year ended December 31, 2001 and 2000, respectively, a decrease of $0.4 million. Revenues for the year ended December 31, 2001 were lower due to lower billable minutes. Direct costs were $0.6 million for both years ended December 31, 2001 and 2000 respectively. Selling, general and administrative expenses were $0.9 for both years ended December 31, 2001 and 2000 respectively. 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 have been fairly consistent over the past few years and are expected to remain around the same as in 2001. 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 $13.3 million for the year ended December 31, 2001 compared to $12.5 million for the year ended December 31, 2000, an increase of $0.8 million. This increase is primarily attributable to increased bad debts expense of $1.9 million, consisting of a reserve of $1.1 million against an unsecured loan receivable from an entity which is owned by GMI's principal shareholder and a reserve of $0.8 million against the amount due from GMI and the Other GMI Subsidiaries (See Note 12 of the Notes To Consolidated Financial Statements), and an increase in insurance expense of $0.3 million, partially offset by a decrease in legal fees of $0.6 million, salary expense of $0.5 million, travel expense of $0.1 million and promotional expense of $0.1 million. 25 Trends - Corporate Administrative Expense Corporate administrative expenses are expected to decrease during 2002 due to a reduction in the number of employees. RENT EXPENSE FROM AFFILIATED COMPANY Rent expense from affiliated company 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 $0.6 million and $0.5 million for the years ended December 31, 2001 and 2000, respectively. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 The Company's revenues were $76.0 million for the year ended December 31, 2000, compared to revenues of $78.8 million for the year ended December 31, 1999, a decrease of $2.8 million. Absent the sale of the Automotive Magazines, revenues would have shown an increase of $2.1 million. Newsstand revenues were $40.2 million and $39.2 million for the year ended December 31, 2000 and 1999, respectively, an increase of $1.0 million. The Automotive Magazines accounted for $1.0 million of 1999 newsstand revenues. Newsstand revenues for Mens Magazines were $39.6 million and $38.1 million for the year ended December 31, 2000 and 1999, respectively, an increase of $1.5 million. Advertising revenues were $9.5 million and $12.6 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $3.1 million. Of this amount, $3.0 million is attributable to a loss of advertising revenue from the sale of the Automotive Magazines. Advertising revenues from Mens Magazines decreased $0.6 million. Advertising revenues from Power magazine was $0.7 million and $0.1 million for the year ended December 31, 2000 and 1999, respectively, an increase of $0.6 million. Subscription revenues were $6.9 million and $7.8 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.9 million. Of this decrease, $0.8 million is attributable to the sale of the Automotive Magazines and $0.1 million is attributable to a decline in subscription revenues from the Mens Magazines. Revenues for the Entertainment Segment were $16.1 million and $16.6 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.5 million. Revenues from the Company's video business were $2.2 million and $2.4 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.2 million. Revenues from the Company's pay-per-call business were $1.1 million and $1.5 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.4 million. Revenues from the Company's internet business were $12.8 million for both the year ended December 31, 2000 and 1999. Income from operations was $11.8 million for the year ended December 31, 2000, compared to a loss from operations of $0.8 million for the year ended December 31, 1999. Income from operations were impacted by: - - an increase in the newsstand cover price of Penthouse Magazine, - - an increase in the newsstand cover price of Penthouse Letters Magazine, 26 - - an increase in the newsstand cover price of Variations Magazine, - - - an increase in the subscription price of Penthouse Magazine, - - decreased production costs and distribution costs as a result of a decrease in the number of newsstand copies printed and a decrease in the number of pages per issue, - - increased revenues from advertising banners on the Company's internet site, - - a suspension of publication of Hot Talk in December 1999 which was an unprofitable publication, - - decreased selling, general and administrative expenses due to decreased consulting fees, attorney fees, commission expense, advertising expense, retail distribution allowance expense, promotional expense, bad debt expense and - - reduced salary expenses caused by a reduction in the number of employees as a result of restructuring the Company's operations. Other income (expense) of $6.4 million for the year ended December 31, 2000 compared to net other income (expense) of $23.4 million for the year ended December 31, 1999. Included in other income (expense) for the year ended December 31, 1999 is a before tax gain of $30.7 million from the sale of the Automotive Magazines. Included in interest expense is the amortization of debt issuance costs and discounts of $0.9 million for the year ended December 31, 2000 compared to $1.0 million for the year ended December 31, 1999. As a result of the above discussed factors, net income before income tax expense (benefit)for the year ended December 31, 2000 was $5.5 million, compared to a net income of $22.6 million for the year ended December 31, 1999. The net revenues and income from operations of the Company were (in millions):
Income (loss) Net Revenue from operations --------------- --------------- Year Ended Year Ended December 31, December 31, --------------- --------------- 1999 2000 1999 2000 ---- ---- ---- ---- Publishing Segment $62.2 $59.9 $5.6 $14.4 Online Segment 12.8 12.8 7.2 8.1 Entertainment Segment 3.8 3.3 1.2 1.8 ----- ----- ----- ----- $78.8 $76.0 $14.0 $24.3 Corporate Administrative Expenses (14.8) (12.5) ----- ----- ----- ----- $78.8 $76.0 $(0.8) $11.8 ===== ===== ====== =====
27 PUBLISHING SEGMENT The net revenues and income from operations of the Publishing Segment were as follows (in millions):
Income (loss) Net Revenue from operations --------------- --------------- Year Ended Year Ended December 31, December 31, --------------- --------------- 1999 2000 1999 2000 ---- ---- ---- ---- Penthouse Magazine and the Affiliate Publications $55.1 $56.6 $4.4 $13.5 Foreign edition licensing 2.0 2.1 1.6 1.7 Power Magazine 0.2 1.2 (0.8) (0.8) Automotive Magazines 4.9 0.4 ----- ----- ---- ----- $62.2 $59.9 $5.6 $14.4 ===== ===== ==== =====
PENTHOUSE MAGAZINE AND THE AFFILIATE PUBLICATIONS Revenues for Penthouse magazine and the Affiliate Publications were $56.6 million and $55.1 million for the year ended December 31, 2000 and 1999, respectively, an increase of $1.5 million. Newsstand revenue was $39.6 million and $38.1 million for the year ended December 31, 2000 and 1999, respectively, an increase of $1.5 million. The increase is primarily attributable to an increase in the cover price of Penthouse magazine offset by a decrease in the number of copies of Penthouse magazine sold and revenue lost due to the suspension of publication of Hot Talk magazine effective December 1999. Advertising revenue was $8.8 million and $9.4 million for the years ended December 31, 2000 and 1999, respectively, a decrease of $0.6 million. The decrease in advertising revenue is primarily attributable to a decrease in the number of advertising pages sold in Penthouse magazine and the Affiliate Publications partially offset by an increase in the average advertising rate per page in these publications. Subscription revenue was $6.9 million and $7.0 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.1 million due primarily to a decrease in the number of subscription copies sold of Penthouse magazine and the Affiliate Publications, offset by an increase in the net revenue per copy sold of the Penthouse and the Affiliate Publications. In the third quarter of 1999 the Company increased the subscription price for Penthouse magazine and reduced discounts offered to its subscription agents to improve the profitability of subscriptions sold. As a result of this action, the Company experienced a decrease in the number of subscription copies sold, with an offsetting increase in net revenue per copy during the year ended December 31, 2000. Publishing-production, distribution and editorial expenses were $28.2 million and $31.2 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $3.0 million. Paper costs were $11.3 million and $11.7 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.4 million. Print costs were $9.5 million for the year ended December 31, 2000, compared to $11.3 million for the year ended December 31, 1999, a decrease of $1.8 million. The decrease is due primarily to a decrease in the number of copies printed and a decrease in the number of pages per issue, as discussed above, partially offset by an increase in the cost of printing. Distribution costs were $4.2 million and $4.9 million for the years ended December 31, 2000 and 1999 respectively, a decrease of $0.7 million. Editorial costs were $3.3 million and $3.4 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.1 million. 28 Selling, general and administrative expenses were $14.7 million for the year ended December 31, 2000, compared to $19.5 million for the year ended December 31, 1999, a decrease of $4.8 million. The decrease is primarily due to a decrease in salary and benefit expense of $1.4 million, in subscription costs of $1.0 million as a result of fewer direct subscription mailings, in promotional expenses of $0.7 million, in advertising expenses of $0.5 million, in commission expenses of $0.5 million, and in retail distribution allowance of $0.3 million during the year ending December 31, 2000. FOREIGN EDITION LICENSING Revenues from licensing of foreign editions, which are included in net revenues - other, were $2.1 million and $2.0 million for the years ended December 31, 2000 and 1999, respectively, an increase of $0.1 million. Selling, general and administrative expenses were $0.4 million for both the year ended December 31, 2000 and 1999. POWER MAGAZINE Revenues for Power magazine were $1.2 million for the year ended December 31, 2000 compared to $0.2 million for the year ended December 31, 1999. Newsstand and subscription revenues were $0.5 million and $21,000 for the years ended December 31, 2000 and 1999, respectively. Advertising revenues were $0.7 million and $0.2 million for the years ended December 31, 2000 and 1999, respectively. Publishing-production, distribution and editorial expenses were $1.3 million and $0.7 million for the years ended December 31, 2000 and 1999, respectively. Paper costs were $0.4 million and $0.3 million for the years ended December 31, 2000 and 1999, respectively. Printing costs were $0.4 million and $0.2 million for the years ended December 31, 2000 and 1999, respectively. Distribution costs were $0.2 million and $0.1 million for the years ended December 31, 2000 and 1999, respectively. Editorial costs were $0.3 and $0.1 million for the years ended December 31, 2000 and 1999, respectively. Selling, general and administrative expenses were $0.7 million and $0.2 million for the years ended December 31, 2000 and 1999, respectively. ONLINE SEGMENT Revenues for the online segment were $12.8 million for both the years ended December 31, 2000 and 1999. Revenues from the sale of memberships to the Company's internet site decreased by $0.6 million during the year ended December 31, 2000, offset by increased advertising revenue of $0.6 million from banners on the Internet Site during the same period. The Company experienced a decline in new members due its use of more aggressive scubbing methods in order to comply with Visa's more stringent requirements regarding chargeback levels. Memberships were also impacted by the decision of American Express to withdraw from the adult entertainment business, which eliminated one possible payment option for customers. To attempt to offset this decline the company intends to intensify its marketing efforts and to offer more promotional incentives to attract new customers and advertisers to the Internet Site. Direct costs were $0.6 million for the year ended December 31, 2000 and $1.0 million for the year ended December 31, 1999, respectively, a decrease of $0.4 million. The decrease is primarily attributable to a decrease in fees paid to content providers of $0.3 million and decreased costs of $0.1 million for content purchased for use on the Internet Site. 29 Selling general and administrative expenses were $4.1 million for the year ended December 31, 2001, compared to $4.5 million for the year ended December 31, 2000, a decrease of $0.4 million. The decrease is primarily attributable to decreased consulting fees of $0.8 million and decreased web hosting charges of $0.2 million, partially offset by increased bank charges of $0.6 million. ENTERTAINMENT SEGMENT Revenues from the Entertainment Segment were $3.3 million for the year ended December 31, 2000, compared to $3.8 million for the year ended December 31, 1999, a decrease of $0.5 million. The Company's video business revenues were $2.2 million for the year ended December 31, 2000 compared to $2.4 million for the year ended December 31, 1999, a decrease of $0.2 million. The decrease was primarily due to lower revenue from pay per view agreements during the year ended December 31, 2000. Revenues from the Company's pay-per-call business were $1.1 million and $1.4 million for the year ended December 31, 2000 and 1999, respectively, a decrease of $0.3 million. Revenue for the year ended December 31, 2000 was lower due to higher chargebacks and reserve rates, lower billable minutes and the termination of certain contracts with respect to the Company's smaller service bureaus. Direct costs were $0.6 million for the year ended December 31, 2000, compared to $1.5 million for the year ended December 31, 1999, a decrease of $0.9 million. The decrease is primarily attributable to decreased costs due to a change to a new national wholesale distributor of DVD's and video cassettes. Selling, general and administrative expenses were $0.9 million and $1.3 million for the year ended December 31, 2000 and December 31, 1999, respectively, a decrease of $0.4 million. This decrease is primarily attributable to decreased consulting expenses of $0.2 million and decreases in other various selling, general and administrative expenses of $0.2 million.. 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 $12.5 million for the year ended December 31, 2000, compared to $14.8 million for the year ended December 31, 1999, a decrease of $2.3 million. This decrease is primarily attributable to decreased expenses of $0.1 million as a result of the sale of the Automotive Magazines, decreased legal fees of $1.0 million, decreased consulting expenses of $0.6 million, decreased salary expenses of $0.5 million and decreased insurance expense of $0.4 million, offset by an increase of $0.3 million in various other corporate administrative expenses. RENT EXPENSE FROM AFFILIATED COMPANY Rent expense from affiliated company 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 $0.5 million for both the years ended December 31, 2000 and 1999. 30 ADDITIONAL SEGMENT INFORMATION See Note 13 of the Notes to Consolidated Financial Statements for additional information on the Company's business segments. 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 possible recession in the economy, an increasingly competitive environment and competition from other content and merchandise providers; (g) the impact of terrorist attacks; and (h) the ability of the Company to generate sufficient cash from future operations to make all the payments required under the Series C Notes. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from changes in interest rates. Management does not believe that it has any foreign currency rate risk. Interest Rates-As of December 31, 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, October and December 2001, the Company retired $0.7 million, $1.1 million and $0.7 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See page F-1 for an index to the Consolidated Financial Statements. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors of the Company serve until the next annual meeting of stockholders or until their successors are elected and qualified. The executive officers serve at the discretion of the Board of Directors in the absence of employment agreements. The following information is submitted with respect to each director and executive officer of the Company at March 28, 2002.
Date Date Elected Elected to Positions Presently Held with the as Present Name Age Registrant Director Office - ------------------ -------- ------------------------------------- -------- ---------- Robert C. Guccione 71 Director, Chairman of the Board, 1993 1993 Publisher, Chief Executive Officer Nina Guccione 42 Director, Executive Vice President, 2000 2000 Assistant Secretary John D. Orlando 48 Director, Senior Vice President, 1999 1998 Chief Financial Officer and Treasurer Laurence B. Sutter 58 Senior Vice President, General -- 1997 Counsel, Secretary William F. Marlieb 73 Director 1993 -- Phyllis Schwebel 74 Director 1993 -- Jerry Siano 68 Director 2000 --
The business experience for the last 5 years of the current directors and executive officers of the Company and those individuals who were directors or executive officers during 2001 is presented below. ROBERT C. GUCCIONE has been a Director, Chairman of the Board, and Publisher of the Company since 1993 and has been Chief Executive Officer of the Company since April 1999. Mr. Guccione was also Chief Executive Officer prior to January 1998. Mr. Guccione founded Penthouse Publications in London in 1965 after having served as managing director and editor-in-chief of London American, a weekly newspaper. 32 JOHN C. PREBICH was a Director, President and Chief Operating Officer from May 2000 to January 2002. Prior to his appointment to that position, Mr. Prebich was Managing Director of the Company from August 1999 to May 2000. Since 1990, he has been the Chairman of the Board, owner and Publisher of KC Publishing, Inc. NINA GUCCIONE has been a Director, Executive Vice President and Assistant Secretary of the Company since November 2000. Ms. Guccione was a Director, Executive Vice President, President- New Media and Secretary of the Company from February 1998 to April 2000. Prior to her appointment to that position, Ms. Guccione was Executive Vice President- New Media and Secretary of the Company from 1996 to February 1998. Ms. Guccione has served in various capacities within the Company for in excess of five years. Ms. Guccione is the daughter of Robert C. Guccione. JOHN D. ORLANDO has been a Senior Vice President-Chief Financial Officer and Treasurer of the Company since August 1998 and a Director since March 1999. Prior to joining the Company, Mr. Orlando was the President of Konica Environmental Products Division of Konica Graphic Imaging International, Inc. (Konica) from 1997 to 1998 and was the Senior Vice President-Chief Financial Officer-Treasurer and Secretary of Konica from 1987 to 1997. Mr. Orlando is a certified public accountant. LAURENCE B. SUTTER has been a Senior Vice President, General Counsel and Secretary of the Company since May 2000. Prior to his appointment to his current position, Mr. Sutter was Senior Vice President, General Counsel and Assistant Secretary of the Company since January 1997. Prior to his appointment to that position, Mr. Sutter was Associate Counsel/Publications and Assistant Secretary. Mr. Sutter has been employed by the Company or its affiliates since 1982 and has been a practicing attorney since 1977. WILLIAM F. MARLIEB is a Director of the Company. Mr. Marlieb was President/Marketing, Sales and Circulation of the Company until his retirement in April 1997. He has been associated with the Company or its affiliates for 24 years. Prior to joining an affiliated company in 1973, he was President of Tilley Marlieb Advertising, Inc. Mr. Marlieb is a past President and Chairman of the Advertising Club of New York. JOHN L. DECKER was a Director of the Company from November 1993 until July 2001. Since 1983, he has been President of Decker & Associates, the publisher of Advertiser and Agency magazines. From 1978 to 1983, Mr. Decker was Senior Vice President and Group Publisher of Knapp Communications, which is responsible for the advertising and circulation of Architectural Digest, Bon Appetit, Go and Home magazines. Mr. Decker received his B.S. in Economics from Villanova University. PHYLLIS F. SCHWEBEL is a Director of the Company. Since 1992, she has been President of The Garth Company, a strategic marketing organization. From 1983 through 1991, Ms. Schwebel was Manager of Market Research for Time magazine and Manager of Corporate Management Research for Time Inc. Ms. Schwebel is a member of the Board of Directors of the American Advertising Federation and immediate past Chairman of its Counsel of Governors. She holds a B.A. from The City University of New York. JERRY SIANO is a Director of the Company. Since 1995 he has been Chief Executive Officer of DiLeondro, Siano & Caserta LLC, which is an advertising agency. Prior to that position he was Chairman of the Board of N.W. Ayer. Mr. Siano holds a Bachelors Degree from The University Of The Arts. 33 ITEM 11. EXECUTIVE COMPENSATION. The following table summarizes the compensation for services rendered to the Company during fiscal years 1999, 2000 and 2001 by (i) the Company's Chief Executive Officer, Robert C. Guccione, and (ii) each of the Company's other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 and whose compensation is required to be disclosed under S.E.C. rules. The compensation for all such officers represents the amounts paid by the Company in respect thereof pursuant to the Properties and Salary Allocation Agreement (for Mr. Guccione) and the Expense Allocation Agreement (for all other such officers). See "Certain Relationships and Related Transactions."
Name and Principal Position Annual Compensation - --------------------------- ------------------------------------------------------------- Year Salary(1) Bonus Other(2) -------- ---------------- -------- ------------- Robert C. Guccione (3) 2001 $ 1,295,462 $ 356,972 Chairman, Chief Executive Officer 2000 $ 1,850,444 $ 277,139 and Publisher 1999 $ 1,530,000 $ 674,124 John C. Prebich (4) 2001 $ 475,000 $114,000 President and Chief Operating Officer 2000 $ 327,019 $142,500 Nina Guccione 2001 $ 95,000 Executive Vice President and 2000 $ 264,904 Assistant Secretary 1999 $ 190,000 John D. Orlando 2001 $ 236,510 Senior Vice President-Chief 2000 $ 222,263 Financial Officer and Treasurer 1999 $ 190,000 $ 9,500 Lawrence B. Sutter 2001 $ 176,831 Senior Vice President, General Counsel 2000 $ 166,985 and Secretary 1999 $ 159,015 $ 6,000
(1) Executive officer compensation is determined pursuant to the allocation provisions of the Properties and Salary Allocation Agreement and the Expense Allocation Agreement referred to above. The allocations were approved by the nonemployee members of the Board of Directors of the Company. See "Compensation Committee Interlock and Insider Participation in Compensation Decisions" and "Certain Relationships and Related Party Transactions." (2) Other compensation represents life insurance premiums paid on behalf of Mr. Guccione, under split dollar policy arrangements. 34 (3) See "Certain Relationships and Related Party Transactions" for a description of amounts advanced by the Company to the Other GMI Subsidiaries, indirectly wholly owned by Mr. Guccione and a trust for the benefit of his children, in 1999, 2000 and 2001. (4) Employment terminated in January 2002. In addition, the Company advanced $286,000 and $254,000 in 2000 and 2001 to KC Publishing, Inc., a company wholly owned by Mr. Prebich. See Note 12 of the Notes To Consolidated Financial Statements. COMPENSATION OF DIRECTORS Directors who are also employees of the Company or any of its subsidiaries do not currently receive any additional compensation for serving as a director or committee member or for attending Board or committee meetings. All other directors receive an annual retainer of $5,000 plus $1,500 for each Board meeting and committee meeting attended. COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS During 2001, two non-employee directors, Mr. Decker and Ms. Schwebel (the "Non-employee Members"), who have never served as officers of the Company or been employees of the Company, acted as the Company's Compensation Committee. Mr. Decker acted in this capacity until he resigned from his position as a director on July 19, 2001. On March 27, 2002, Mr. Siano, a non-employee director, was elected to serve on the Company's Compensation Committee. The salary of Mr. Guccione is determined and paid by GMI. The Non-employee Members reviewed and approved the reimbursement of GMI by the Company in an amount equal to the portion of the salary of Mr. Guccione allocated to the Company pursuant to the Properties and Salaries Allocations Agreement. In addition, the Non-employee Members reviewed and approved the expenses allocated to the Company for its use of the Townhouse pursuant to the Properties and Salary Allocation Agreement. See "Certain Relationships and Related Transactions." 35 RETIREMENT SAVINGS PLAN The General Media Communications, Inc. Employees' Retirement Savings Plan and Trust (the "Plan") is a tax-exempt defined contribution (401(k) plan covering all employees of GMI and its affiliates (including the Company) who have completed 1,000 hours of service in one plan year and are twenty-one years of age or older. GMI may make discretionary contributions to the Plan from its current profits, before profit-sharing costs and income taxes, in each plan year, in such amounts as authorized by the Board of Directors of GMI, provided that the amount of the contribution for each plan year does not exceed 3% of the qualified earnings of each participant. Participants may contribute up to 15% of their annual wages before bonuses and overtime up to a maximum pre-tax contribution of $10,500 in 2001. Participant's accounts are credited with the participant's contribution and an allocation of (a) GMI's contribution, if any, (b) Plan earnings, and (c) forfeitures of terminated participants' nonvested accounts, if any. Allocations are based on participant earnings on account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participant's account. Participants are immediately vested in their pre-tax contributions plus actual earnings thereon. Vesting in the remainder of their accounts begins after completing two years of service and vests in equal amounts until the participant has completed five years of service, at which time the participant becomes 100% vested. Under the Plan, participating employees can allocate funds in their account among several investment options. Upon termination of service, a participant may elect to receive an amount equal to the vested value of his or her account, in either a lump-sum or in monthly, quarterly, or semiannual payments from the Plan over a period not extending beyond the life expectancy of the participant and his or her spouse. As of December 31, 2001, Robert Guccione, Lawrence Sutter and Nina Guccione were 100% vested in profit sharing contributions made by GMI. Amounts contributed by GMI, if any, on behalf of employees who performed services for the Company are reimbursed to GMI by the Company pursuant to the Expense Allocation Agreement. See "Certain Relationships and Related Transactions." The Company did not make any contributions to the Plan in fiscal years 1999, 2000 and 2001. 36 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of March 28, 2002, 475,000 shares of the Company's issued and outstanding Common Stock were held by GMI, 2,401 shares of the Company's Common Stock were held by two former Warrant holders who converted common stock purchase Warrants into Common Stock on December 22, 2000 and 10,906 shares of the Company's Class A Preferred Stock were held by the Consenting Holders. The following table sets forth certain information regarding the beneficial ownership of GMI's common stock as of March 28, 2002.
GMI Shares Percent Name and Address Common Stock(1) Beneficially Owned of Class - -------------------------------- --------------- ------------------ -------- Robert C. Guccione 16 East 67th Street Class A 6.67 66.7% New York, New York 10022 Class B 0.00 0.0 Robert C. Guccione Family Class A 3.33 33.3 Trust No. 1 Class B 1.62 100.0 C/O ATC Trustees (Cayman) Ltd. Cayside, 2nd Floor Harbor Drive George Town, Cayman Islands, BWI
(1) Holders of Class A and Class B common stock have equal voting rights and are entitled to one vote per share. Pursuant to the provisions of the Company's Certificate of Incorporation, if there should be a payment Event of Default under the indenture governing the Company's Series C Notes, the holders of the Company's Class A Preferred Stock would be entitled to appoint a majority of the members of the Company's Board of Directors for as long as such Event of Default shall continue. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. GMI owns (together with Robert C. Guccione, who owns a 1% interest and utilizes such facilities as his residence and his executive offices) a Townhouse. The Townhouse is used for various Company related activities, including business meetings, client entertainment, charitable functions, magazine photography sessions and promotional and marketing events. Expenses of maintaining the Townhouse, as well as any applicable debt service requirements, are the responsibility of GMI. Pursuant to the Properties and Salary Allocation Agreement among the Company, GMI and a GMI subsidiary, the Company reimbursed GMI in the amounts of approximately $0.5 million in both 1999 and 2000, and $0.6 million in 2001, for the use of the Townhouse for Company purposes. See "Compensation Committee Interlock and Insider Participation in Compensation Decisions." The Properties and Salary Allocation Agreement also provides that the salary of Mr. Guccione is determined and paid by GMI. Pursuant to this agreement, the Company reimburses GMI for a portion of such salary based upon an allocation of the relative business time spent by Mr. Guccione on GMI related business and on Company related business. In 2001, 2000 and 1999, the Company reimbursed GMI in the amounts of 37 approximately $1.3 million, $1.9 million and $1.5 million, respectively, for the allocable amount of Mr. Guccione's salary. GMI, the Company and the Other GMI Subsidiaries are parties to the Tax Sharing Agreement pursuant to which such parties file consolidated federal, state and local income tax returns so long as permitted by the relevant tax authorities. The Tax Sharing Agreement sets forth the methodology for allocating income taxes and the use of net operating losses ("NOLs") between the Company, GMI and the Other GMI Subsidiaries. The Company, however, is not required to pay income or franchise taxes (except certain alternative taxes) to the extent that it can utilize a portion of the NOLs of GMI and the Other GMI Subsidiaries pursuant to the terms of the Tax Sharing Agreement. Prior to 2000, the Company was not required to reimburse GMI and the Other GMI Subsidiaries for the use of the NOLs generated by these entities. In addition, the Tax Sharing Agreement provides that GMI and the other GMI Subsidiaries indemnify the Company from any income or franchise tax liabilities of the consolidated group in excess of the $26 million arising during years ending through December 31, 1993. The Company, GMI and the Other GMI Subsidiaries also have entered into an Expense Allocation Agreement, which sets forth the methodology for allocating common expenses as among the parties to the Expense Allocation Agreement including expenses related to the use of and occupancy costs for the Company's principal corporate offices in New York City. Pursuant to the Expense Allocation Agreement, items of common expense are allocated primarily on the basis of estimates of time spent and space occupied by relevant personnel, including executive personnel (other than Mr. Guccione), data processing, accounting, production and sales support and administrative personnel. The Company pays such combined expenses and allocates to GMI and the Other GMI Subsidiaries the portions due by such companies. Costs incurred directly by subsidiaries of the Company solely for their benefit are paid directly by such companies, as are direct costs incurred by the Other GMI Subsidiaries solely for their benefit. The amount receivable under the Property and Salary Allocation Agreement and the Expense Allocation Agreement at December 31, 2000 and 2001 was $1.4 million and $3.8 million, respectively, as $3.0 million was advanced by the Company to GMI and the Other GMI subsidiaries in 1999, $2.9 million in 2000 and $3.2 million in 2001. In 2001, the Company established a reserve of $0.8 million against the amount due from GMI and the Other GMI Subsidiaries as collectability is not fully assured. As discussed more fully in Note 5 of the Notes To Consolidated Financial Statements, on March 27, 2000, the Company received a payment of approximately $0.8 million toward this balance through the transfer of the outstanding stock of a subsidiary of GMI. In October 1997, Mr. Guccione was granted a loan in the amount of $1.2 million from NTS, a company that had simultaneously entered into an agreement with the Company to provide services for the Company's pay-per-call business. The loan was in consideration of Mr. Guccione personally guaranteeing all material obligations of the Company under the agreement. Mr. Guccione defaulted on this loan when it became due upon the Company's refinancing of its Senior B Notes in March 2001. As provided in the agreement, NTS began to apply payments due the Company on its pay-per-call services to the loan. At December 31, 2001, the remaining principal balance of the loan and unpaid interest thereon amounted to $887,000. As more fully described in Note 10 of the Notes To Consolidated Financial Statements, NTS filed a complaint against Robert C. Guccione, GMI and the Company (the "Defendants") seeking damages in connection with this loan and with respect to claims that the Defendants had breached agreements with NTS. At December 31, 2001, the Company had a $1.0 million loan receivable from Mr. Guccione, pursuant to a promissory note. Such loan bears interest at 11% per annum and is due on December 31, 2002. At December 31, 2001, the Company had a $1.1 million loan receivable from a foreign company which is principally owned by Mr. Guccione, which amount has been fully reserved at December 31, 2001 as collectability is not assured. 38 Included in prepaid expenses and other current assets as of December 31, 2001 are approximately $0.4 million of receivables from KC Publishing, Inc., a company owned by the Company's former President and Chief Operating Officer. The Company has established a full reserve against these receivables as collectibility is not assured. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are being filed as part of this Report: (1) See page F-1 for an index of consolidated financial statements. (2) See page F-1 for an index of financial statement schedules. (3) Exhibits:
Exhibit No. Description ------- ----------- *3.2 -- By-Laws of the Company. 3.3 -- Amended And Restated Certificate of Incorporation of the Company, filed with the Secretary of State of Delaware on March 29, 2001 (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). *4.2 -- Indenture, dated as of December 21, 1993, between the Company and IBJ Schroder Bank & Trust Company, as trustee ("Trustee"), containing, as exhibits, specimens of Series A Notes and Series B Notes. *4.4 -- Security Agreement, dated December 21, 1993, between the Company and Trustee. *4.5 -- Pledge Agreement, dated December 21, 1993, between the Company and Trustee. *4.6 -- Copyright Security Agreement, dated December 21, 1993, between the Company and Trustee. *4.7 -- Trademark Security Agreement, dated December 21, 1993, between the Company and Trustee. 4.8 -- First Supplemental Indenture, dated May 19, 1999, among the Company, each of the Subsidiary Guarantors and IBJ Whitehall Bank & Trust, as trustee (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 4.9 -- Second Supplemental Indenture, dated March 29, 2001, among the Company, each of the Subsidiary Guarantors and The Bank Of New York, as trustee, containing, as exhibits, specimens of Series C Notes (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the year ended
39
Exhibit No. Description ------- ----------- December 31, 2000). 4.10 -- Registration Rights Agreement, dated as of March 29, 2001, between the Company and the holders of the Company's Class A Preferred Stock (incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 4.11 -- Amendment To Security Agreement, dated as of March 29, 2001, among the Company, each of the Subsidiary Grantors and The Bank Of New York, as collateral agent (incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). +*10.1 -- Distribution Agreement, dated September 19, 1977, among Curtis Circulation, Penthouse International, Ltd., Forum International, Ltd., Viva International, Ltd., Penthouse Photo World, Ltd. and Penthouse Poster Press, Ltd.; Amendment No. 1, undated; Amendment No. 2, dated September 8, 1982; Amendment No. 3, dated March 18, 1985; and Amendment No. 4, dated February 1, 1986. *10.8 -- Properties and Salary Allocation Agreement, dated December 21, 1993, among the Company, GMI and Locusts on the Hudson River Corp. *10.9 -- Expense Allocation Agreement, dated December 21, 1993, among the Company, GMI and the Other GMI Subsidiaries. *10.10 -- Tax Sharing and Indemnification Agreement, dated December 21, 1993, among the Company, GMI and the Other GMI Subsidiaries. +10.11 -- Circulation Subscription Fulfillment Services Agreement, dated September 15, 1994, between Palm Coast Data, Ltd., Penthouse International, Ltd., Omni Publications International, Ltd., Longevity International, Ltd., Four Wheeler Publishing, Ltd., Stock Car Racing Publications, Inc., Open Wheel Publications, Inc., Super Stock Publications, Inc., Forum International, Ltd. and Variations Publishing International, Ltd.; Amendment, dated September 16, 1994 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 -- Agreement of Lease between M393 Associates LLC and General Media, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form-10-Q for the quarter ended September 30, 1998). 10.15 -- Amendment To Distribution Agreement, dated November 8, 1995, among Curtis Circulation Company, Penthouse International, Ltd., Forum International, Ltd., Four Wheeler Publishing, Ltd., Penthouse Letters, Ltd., Omni Publications International, Ltd., Variations International, Ltd., Girls Of Penthouse Publications, Inc., Longevity International, Ltd., Hot Talk Publications, Ltd., Stock Car Racing Publishing, Ltd., Super Stock And Drag Racing Illustrated Publishing, Ltd., and Open Wheel Publishing, Ltd.
40
Exhibit No. Description ------- ----------- ++10.16 -- Printing Agreement, dated October 12, 2001 between Quebecor World, Inc. and General Communications, Inc. (to print Penthouse, Girls Of Penthouse and Penthouse Letters). ++10.17 -- Printing Agreement, dated April 26, 2001 between Transcontinental Printing and General Media Communications, Inc. (to print Penthouse - Canadian Version, Forum and Variations and Forum and Variations Specials) 12.1 -- Computation of ratio of earnings to fixed charges. 21.1 -- Subsidiaries of the Company.
- ---------- * Previously filed with Registration Statement No. 33-76716 on Form S-4, and incorporated herein by reference to such Registration Statement. + Confidential treatment has been granted with respect to certain information contained in this exhibit. ++ Confidential treatment has been requested with respect to certain information contained in this exhibit. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the fourth quarter of 2001. (c) Exhibits: See paragraph (a)(3) above for a listing of items filed as exhibits to this Form 10-K as required by Item 601 of Regulation S-K. (d) Financial Statement Schedules: See page F-1 for an index of financial statement schedules filed as part of this Form 10-K. 41 GENERAL MEDIA, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets, December 31, 2000 and 2001 F-3 - F-4 Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001 F-5 Consolidated Statement of Stockholder Deficiency for the Years Ended December 31, 1999, 2000 and 2001 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001 F-7 - F-8 Notes to Consolidated Financial Statements F-9 - F-26 Report of Independent Certified Public Accountants on Schedule S-1 Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or the required information is contained in the financial statements or notes thereto. F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors GENERAL MEDIA, INC. AND SUBSIDIARIES We have audited the accompanying consolidated balance sheets of General Media, Inc. (a Delaware corporation and wholly-owned subsidiary of General Media International, Inc.) and Subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholder deficiency and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of General Media, Inc. and Subsidiaries as of December 31, 2000 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, at December 31, 2001, the Company's current liabilities exceeded current assets by $22,331,000. In addition, it is unlikely that the Company can generate sufficient funds from operations to make all the mandatory payments required by its Series C Notes during 2002. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GRANT THORNTON LLP New York, New York March 8, 2002 F-2 General Media, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, (amounts in thousands)
ASSETS 2000 2001 ------- ------- CURRENT ASSETS Cash and cash equivalents $ 6,425 $ 2,431 Accounts receivable, net of allowance for doubtful accounts of $1,301 in 2000 and $1,852 in 2001 6,220 3,340 Inventories 6,323 4,447 Prepaid expenses and other current assets 1,896 1,855 ------- ------- Total current assets 20,864 12,073 WORKS OF ART AND OTHER COLLECTIBLES 2,270 2,270 PROPERTY AND EQUIPMENT - AT COST, net of accumulated depreciation and amortization 2,890 2,420 OTHER ASSETS Due from affiliated companies 1,389 3,805 Rent security deposits 1,562 1,496 Deferred subscription acquisition costs, net 690 1,282 Loan to shareholder 1,000 1,000 Loan to affiliated company 1,086 Deferred debt issuance costs, net 165 Other 896 1,440 ------- ------- 6,788 9,023 ------- ------- $32,812 $25,786 ======= =======
The accompanying notes are an integral part of these statements. F-3 General Media, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, (amounts in thousands)
LIABILITIES AND STOCKHOLDER DEFICIENCY 2000 2001 ---------- -------- CURRENT LIABILITIES Current maturities of Senior Secured Notes $ 2,943 $ 5,800 Accounts payable 9,799 12,439 Accrued retail display allowances 2,365 1,407 Deferred revenue 10,151 9,551 Accrued expenses and other current liabilities 3,994 2,442 Accrued interest - Senior Secured Notes 2,763 1,840 Income taxes payable 964 925 -------- -------- Total current liabilities 32,979 34,404 SENIOR SECURED NOTES, less current maturities 49,057 43,257 UNEARNED REVENUE 1,702 1,433 OTHER LONG-TERM LIABILITIES 1,223 1,130 COMMITMENTS AND CONTINGENCIES MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK 9,450 REDEEMABLE WARRANTS 582 STOCKHOLDER DEFICIENCY Common stock, $.01 par value; authorized, 1,000,000 shares; issued and outstanding, 477,401 shares 5 5 Capital in excess of par value 3,071 1,822 Accumulated deficit (55,807) (65,715) -------- -------- (52,731) (63,888) -------- -------- $ 32,812 $ 25,786 ======== ========
The accompanying notes are an integral part of these statements. F-4 General Media, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, (amounts in thousands)
1999 2000 2001 -------- -------- -------- Net revenues $ 78,811 $ 76,001 $ 65,433 -------- -------- -------- Operating costs and expenses Publishing - production, distribution and editorial 34,449 29,624 24,240 Entertainment - direct costs 2,494 1,244 1,050 Selling, general and administrative 40,472 31,479 28,333 Bad debts expense 757 563 3,312 Rent expense from affiliated companies 542 540 571 Depreciation and amortization 941 714 600 -------- -------- -------- Total operating costs and expenses 79,655 64,164 58,106 -------- -------- -------- Income (loss) from operations (844) 11,837 7,327 Other income (expense) Debt restructuring expenses (9,579) Interest expense (7,969) (6,865) (8,003) Interest income 762 495 289 Gain on sale of Automotive Magazines 30,657 -------- -------- -------- Total other income (expense), net 23,450 (6,370) (17,293) -------- -------- -------- Income (loss) before provision for income taxes and extraordinary item 22,606 5,467 (9,966) Income tax expense (benefit) 3,390 2,239 (58) -------- -------- -------- Income (loss) before extraordinary item 19,216 3,228 (9,908) Extraordinary gain from extinguishment of debt, net of income taxes of $15 in 1999 and $465 in 2000 671 571 -------- -------- -------- NET INCOME (LOSS) $ 19,887 $ 3,799 $ (9,908) ======== ======== ========
The accompanying notes are an integral part of these statements. F-5 General Media, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDER DEFICIENCY Years ended December 31, 1999, 2000 and 2001 (amounts in thousands)
Capital in Common excess of Accumulated stock par value deficit Total --------- -------------- ------------- -------- Balance - December 31, 1998 $5 $1,418 $(79,493) $(78,070) Net income for the year 19,887 19,887 Contribution to capital by Parent Company 1,480 1,480 -- ------- -------- -------- Balance - December 31, 1999 5 2,898 (59,606) (56,703) Net income for the year 3,799 3,799 Exercise of warrants 173 173 -- ------- -------- -------- Balance - December 31, 2000 5 3,071 (55,807) (52,731) - ------- -------- -------- Net loss for the year (9,908) (9,908) "Paid in kind" dividends on mandatorily redeemable preferred stock (1,000) (1,000) Accretion of mandatorily redeemable preferred stock (249) (249) -- ------- -------- -------- BALANCE - DECEMBER 31, 2001 $5 $1,822 $(65,715) $(63,888) == ======= ======== ========
The accompanying notes are an integral part of this statement. F-6 General Media, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (amounts in thousands)
1999 2000 2001 -------- -------- -------- Cash flows from operating activities Net income (loss) $ 19,887 $ 3,799 $ (9,908) -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 941 714 600 Debt restructuring costs 9,579 Bad debts expense 757 563 3,312 Amortization of unearned revenue (1,023) (364) (268) Interest on loan to shareholder (77) (95) (110) Amortization of bond costs 971 873 Income taxes forgiven by affiliated companies 1,480 Income taxes reimbursable to affiliated companies 2,718 Extraordinary gain from extinguishment of debt (686) (1,036) Gain on disposition of Automotive Magazine assets (30,657) Changes in operating assets and liabilities Accounts receivable 138 18 1,454 Inventories 135 (1,800) 1,876 Other current assets 1,562 (422) 41 Other assets 1,788 (807) (905) Accounts payable, accrued expenses and other current liabilities (5,233) (3,061) 130 Accrued interest on Senior Secured Notes 2,763 (923) Income taxes payable 765 (55) (39) Deferred revenue 220 236 (600) Other long-term liabilities 1,150 73 (93) -------- -------- -------- (27,769) 318 14,054 -------- -------- -------- Net cash provided by (used in) operating activities (7,882) 4,117 4,146 -------- -------- -------- Cash flows from investing activities Capital expenditures (638) (232) (130) Proceeds from sale of Automotive Magazines 35,000 -------- -------- -------- Net cash provided by (used in) investing activities 34,362 (232) (130) -------- -------- --------
F-7 General Media, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Year ended December 31, (amounts in thousands)
1999 2000 2001 --------- -------- -------- Cash flows from financing activities Advance to affiliated companies $ (2,971) $(2,911) $(3,216) Debt issuance costs (165) (1,961) Purchase of Senior Secured Notes (26,600) (2,943) Repayments from affiliated companies 2,118 Loan to shareholder (54) Repayment from shareholder 200 11 110 -------- ------- ------- Net cash used in financing activities (27,253) (3,119) (8,010) -------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (773) 766 (3,994) Cash and cash equivalents at beginning of year 6,432 5,659 6,425 -------- ------- ------- Cash and cash equivalents at end of year $ 5,659 $ 6,425 $ 2,431 ======== ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for Interest $ 6,996 $ 3,200 $ 8,911 Income taxes 1,120 236 17 Supplemental disclosures of cash flow information: Noncash issuance of mandatorily redeemable convertible preferred stock $ 8,200 Noncash "paid in kind" dividends on mandatorily redeemable preferred stock 1,000 Noncash expiration of redeemable common stock warrants Noncash accretion of mandatorily redeemable preferred 582 stock to liquidation preference 249 Noncash repayment by affiliated companies $ 1,800 Exercise of warrants for stock not yet issued (related stock issued in early 2001) 173
The accompanying notes are an integral part of these statements. F-8 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 2000 and 2001 NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES General Media International, Inc. ("GMI") is the holder of 99.5% of the common stock of General Media, Inc. and Subsidiaries (the "Company"). On March 29, 2001 the Company issued 9,905 shares of mandatorily redeemable convertible preferred stock to third parties (See Note 7). General Media, Inc. and Subsidiaries is a publishing, online and entertainment company engaged in the publication and sale of men's magazines, the sale of various adult-oriented online products and services, the sale of various adult-oriented entertainment products and services, the licensing of its trademarks to publishers in foreign countries and for use on various consumer products and services, and until March 1999, the production and sale of automotive magazines and an automotive television series. Penthouse is the Company's most significant trademark and is used extensively by its publishing, online, entertainment and foreign edition licensing operations. In December 1999, the Company launched a new magazine called Mind & Muscle Power ("Power") which targeted the men's health magazine market. Results were below expectations and the publication was suspended after the November 2000 issue. The Company's operations are located primarily in New York City, and the Company has a broad customer base. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: a. Principles of Consolidation The consolidated financial statements include the accounts of the Company and all its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. b. Revenue Recognition Sales of magazines for retail distribution are recorded on the on-sale date of each issue based on an estimate of the revenue for each issue of the magazine, net of estimated returns. Estimated revenues are adjusted to actual revenues as actual sales information becomes available. The Company receives an advance payment from its distributor on the on-sale date of each issue. Revenues from advertising are recognized on the on-sale date of each issue in which the advertising was included. F-9 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 1 (CONTINUED) Revenues from the sale of magazine subscriptions are recognized over the term of the subscriptions. Revenues from the sales of films and videocassettes are recognized in the period in which the product is shipped. Returns are generally not material. Revenues from product and trademark licensing are recorded in the period in which earned. Revenues from the sale of memberships to the Company's internet site are recognized over the term of the membership. Revenues from pay-per-call programs are recorded in the period in which the calls are made. c. Inventories Paper and printing costs are valued at the lower of cost (first-in, first-out method) or market. Editorials and pictorials are valued at actual cost. Film and programming costs are the direct cost of production, less amounts amortized over the expected period of revenue, generally twelve to eighteen months from the film release date. d. Works of Art and Other Collectibles Works of art and other collectibles are carried at lower of cost or estimated fair value. At December 31, 2001 and 2000, all works of art and collectibles are recorded at cost. e. Deferred Subscription Acquisition Costs The costs of acquiring subscriptions related to direct response marketing are deferred and amortized over the life of the subscriptions, generally twelve months. Amortization of these costs is done on a cost-pool-by-cost-pool basis over the period as future revenues are expected to be recognized. f. Property and Equipment Property and equipment are stated at cost. Depreciation is provided by the straight-line method based upon the estimated useful lives of the assets. Furniture and equipment and computer hardware and software are depreciated over five years and leasehold improvements are depreciated over the life of the lease. F-10 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 1 (CONTINUED) g. Cash Equivalents The Company considers its money market funds with an original maturity of three months or less to be cash equivalents. h. Management Charges The Company incurs shared common indirect expenses for the benefit of GMI and affiliated companies, including accounting, personnel, data processing, employee relations and other administrative services. In addition, the Company is charged by GMI and its subsidiaries for other corporate overhead costs, executive compensation and costs which principally relate to office space, including interest charges and depreciation. These allocations are based on factors determined by management of the Company to be appropriate for the particular item, including estimated relative time commitments of managerial personnel, relative number of employees and relative square footage of all space occupied. In the opinion of management, the results of operations of the Company reflect all of the Company's costs, including salaries, rent, depreciation, legal and accounting services and other general and administrative costs. i. Concentration of Credit Risk and Fair Value of Financial Instruments The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its cash and temporary cash investments with high credit quality institutions. In general, such balances generally exceed the FDIC insurance limit. Management of the Company provides credit, in the normal course of business, to a significant number of advertisers in the tobacco, alcohol and adult entertainment industries. The Company routinely assesses the financial strength of its customers and newsstand distributors and, as a consequence, believes that its trade accounts receivable exposure is limited. The carrying value of financial instruments (principally consisting of cash and cash equivalents and receivables) approximates fair market value due to its short-term nature. There is no established public trading market for the Company's Senior Secured Notes and it would by impractical to estimate fair value at December 31, 2001 without incurring excessive cost. F-11 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 1 (CONTINUED) No customer of the Company accounted for more than ten percent of the Company's net revenues in 1999, 2000 or 2001, and no part of the business is dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on the Company. j. Income Taxes The Company makes estimates of its current tax exposure and temporary differences resulting from timing differences for reporting items for book and tax purposes. The Company recognizes deferred taxes by the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statuatory 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 k. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. l. Reclassification of Prior Periods Certain amounts in the 1999 and 2000 financial statements have been reclassified to conform to the 2001 presentation. NOTE 2 - BASIS OF PRESENTATION AND LIQUIDITY 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. The Company's cash balance was $2,431,000 at December 31, 2001, compared to $6,425,000 at December 31, 2000. During the year ended December 31, 2001, the Company provided $4,146,000 in cash flows from operating activities. However the Company paid $3,216,000 in advances to an affiliated company, incurred $1,961,000 in debt issuance costs and paid $2,943,000 in mandatory principal payments for its Series C Notes, resulting in a net decrease in its cash balance at December 31, 2001. At December 31, 2001, the Company's current liabilities exceeded current assets by $22,331,000. The Company's Series C Notes require interest payments of approximately $7,045,000 and amortization payments of $5,800,000 during the next year. The management of the Company does not believe it can generate sufficient funds from operations to make all of the 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 currently negotiating with the holders of the Series C Notes (the "Holders") for a reduction in its debt service payments. There can be no assurance that the Company will be successful in obtaining a reduction in the debt service payments. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying blance sheets is dependent upon the Company's ability to obtain financing and continued operations of the Company. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company has undertaken the following actions to attempt to achieve profitability and improve cash flow: F-12 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 2 (CONTINUED) - - 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. - - Reduce production costs of its magazines by changing the paper grades on its magazines and by changing their design to improve production efficiencies. - - Reduce the amount of cash expended to promote subscriptions and reduce the amount of cash expended on other selling, general and administrative expenses. - - Improve revenue by adding additional special issues of its magazines. 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. NOTE 3 - INVENTORIES Inventories include the following at December 31:
2000 2001 -------- -------- --------(in thousands)------- Paper and printing $3,432 $1,411 Editorials and pictorials 2,271 2,239 Film and programming costs 620 797 -------- -------- $6,323 $4,447 ======== ========
NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment as of December 31, consist of:
2000 2001 -------- ------ --------(in thousands)------- Furniture and equipment $6,253 $6,253 Leasehold improvements 1,871 1,871 Computer hardware and software 2,772 2,902 Other 66 66 -------- -------- 10,962 11,092 Accumulated depreciation and amortization (8,072) (8,672) -------- -------- $2,890 $2,420 ======== ========
Depreciation and amortization expense on property and equipment was $838,000, $714,000 and $600,000 for the years ended December 31, 1999, 2000 and 2001, respectively. F-13 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 5 - SENIOR SECURED NOTES On December 21, 1993, the Company issued $85,000,000 of Senior Secured Notes (the "Notes") at an issue price equal to 99.387% of the principal amount of the Notes. 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. 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. During the first three months of 2000, the Company made non-permitted advances of approximately $1,005,000 to GMI that caused non-compliance with certain covenants of the indenture. This amount was repaid in full with interest on March 27, 2000 by a transfer of the outstanding stock of a subsidiary of GMI whose net assets, consisting of works of art and other collectibles, had an appraised value of $1,800,000 at the time of transfer. The remaining balance of $795,000 was applied against the outstanding receivable from GMI. 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 F-14 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 5 (CONTINUED) 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 2002 and $6,500,000 during 2003, with the balance due in 2004. In addition, further amortization equal to 50% of excess cash flow in each year is required. The Company made amortization payments of $2,943,000 during the year ended December 31, 2001. The indenture under the original Notes (the "Indenture") has been extended to the March 29, 2004 maturity of the Series C Notes. The original Indenture contained covenants, that will 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 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 payment on split dollar life insurance on the life of the Company's principal beneficial owner. As of December 31, 2001, the Company was in compliance with all such covenants. NOTE 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 of $9,579,000 consisting of a fee of approximately $1,030,000 to Consenting Holders as well as their legal fees and related expenses of approximately $177,000, legal fees and expenses for the Company's own lawyers and representatives of approximately $754,000 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. F-15 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 7 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK On March 29, 2001, the Company issued 9,905 shares of Preferred Stock to the Consenting Holders at 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. For the year ended December 31, 2001, the Company recorded $249,000 of such accretion. For the year ended December 31, 2001, the Company also recorded "paid-in-kind" dividends of approximately $1,000,000. 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. F-16 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 8 - SALE OF AUTOMOTIVE MAGAZINES On March 2, 1999 (the "Closing Date"), the Company sold substantially all of the assets, exclusive of net newsstand and advertising accounts receivable, of its wholly-owned subsidiary, General Media Automotive Group, Inc. ("GMAG"), to EMAP Petersen, Inc. ("EMAP") for $35,000,000 in cash plus the assumption of certain liabilities and deferred subscription liabilities, as defined in the Asset Sale and Purchase Agreement between EMAP and GMAG dated as of February 9, 1999 (the "Asset Purchase Agreement"). There are no material relationships between EMAP and the Company or any of its affiliates, any director or officer of the Company, or any associate of any such director or officer. The sale price was subject to an adjustment, that was determined to be $156,000 in the Company's favor, which is the amount that net working capital, as defined in the Asset Purchase Agreement, deviated from $1,500,000. The Company recorded an after-tax gain of approximately $27,000,000 on the sale. On April 27, 1999, the Company tendered an Offer To Purchase and Consent Solicitation Agreement (the "Offer") to the registered holders (the "Noteholders") of the Notes. The Offer solicited consents from Noteholders for the adoption of certain proposed waivers and amendments to the Indenture, and solicited the Noteholders consent to the Company's offer to purchase for cash, on a pro rata basis, $28,000,000 in aggregate principal amount of the Notes from the proceeds received from the sale of the Automotive Magazines (the "Sales Proceeds"). The purchase price offered was $0.95 for each $1.00 in principal amount of Notes tendered and accepted pursuant to the Offer, plus accrued interest through and including the date of purchase. The Offer further requested the Noteholders to consent to the release to the Company for general working capital of approximately $2,700,000 remaining from the Sales Proceeds, after giving effect to the purchase of the Notes contemplated in the Offer and costs associated with the sale of the Automotive Magazines. In May 1999, a majority of the Noteholders consented to the waivers and amendments to the Indenture and tendered the full $28,000,000 in principal amount of Notes for purchase by the Company for cash of $26,600,000. The remaining cash of approximately $2,700,000 was released to the Company for general working capital purposes. The effect of this Offer was a reduction in Notes outstanding of $28,000,000, a reduction in interest expense in Fiscal 1999 of approximately $1,800,000, a net gain of $671,000 on the retirement of the Notes and a reduction in available cash of approximately $28,000,000. The gain of $671,000 net of income taxes of $15,000 has been reflected in the consolidated statements of operations as an extraordinary item. F-17 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 9 - INCOME TAXES The income tax provision for the year ended December 31 consists of:
1999 2000 2001 ------- ------- ------ ------------(in thousands)---------- Current Federal $ 1,519 $ 1,580 $ State 1,871 673 25 Foreign (14) (83) ------- ------- ---- $ 3,390 $ 2,239 $(58) ======= ======= ====
The Company incurred a taxable loss of approximately $1,475,000 for the year ended December 31, 2001. The state income tax provision for the year ended December 31, 2001 is comprised of minimum taxes. The benefit in the foreign tax provision for the year ended December 31, 2001 is the result of a favorable settlement of a foreign tax audit from a prior year. The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings before income taxes, as a result of the following:
1999 2000 2001 ---- ---- ---- Statutory Federal income tax rate 34.0% 34.0% 34.0% Net operating loss and other tax benefits for which no current tax benefit is being realized (34.0) State taxes, net of Federal income tax 5.6 7.4 Net change in valuation allowance for deferred taxes 7.2 2.2 Utilization of Federal AMT credit carryforward (2.3) Foreign tax refund (.3) Utilization of net operating loss carryforwards (31.8) -------- -------- -------- Effective tax rate 15.0% 41.0% --% ======== ======== ========
F-18 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 9 (CONTINUED) Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax assets and liabilities at December 31 were as follows:
2000 2001 ------ ------- --(in thousands)-- Deferred tax assets Debt financing costs $ $ 2,874 Allowance for doubtful accounts 426 740 Deferred rent - 11 Penn Plaza 105 151 Accrued bonuses 170 100 Accrued severance 130 Net operating loss carryforwards 590 ----- ------- Gross deferred tax asset 831 4,455 Deferred tax liabilities Depreciation (86) (46) ----- ------- Gross deferred tax liability (86) (46) ----- ------- Valuation allowance (745) (4,409) ----- ------- Net deferred tax asset $ -- $ -- ===== =======
The Company has established a full valuation allowance with respect to the future realization of net deferred tax assets due to the uncertainty of the Company's ability to generate sufficient future taxable income. The Company and its subsidiaries are included in the consolidated Federal income tax return of GMI. The provision for income taxes (benefit) in the accompanying statements of operations is allocated to the Company from GMI as if the Company filed separate income tax returns. Since each member of a consolidated tax group is jointly and severally liable for Federal income taxes of the entire group, the Company may be liable for taxes of GMI or other members of the consolidated group. Under the terms of a Tax Sharing and Indemnification Agreement (the "Agreement"), the Company is required to remit income taxes to GMI beginning in the year in which the Company's Senior Secured Notes are paid to the extent that the Company utilizes the net operating losses ("NOL's") of GMI to reduce its income tax liabilities. At January 1, 2001, GMI had available for Federal income tax purposes NOL's aggregating approximately $86,987,000 which can be used by the Company to reduce future income taxes, as long as the Company is a member of GMI's consolidated group, which will expire in tax years ending 2007 to 2020. The Company's ability to utilize net operating losses may be limited in the future due to the additional issuance of GMI's common stock or other changes in control, as defined in the F-19 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 9 (CONTINUED) Internal Revenue Code and related regulations. To the extent that the Company utilizes such NOL's, the Company is required to pay GMI, within thirty days after the Company pays the group consolidated tax liability, an amount that would have been paid in taxes had such NOL's not been available. The Internal Revenue Service has completed an audit of GMI's Federal income tax returns for the years ended 1986 through 1990. This audit resulted in a tax deficiency totaling $35,000 plus interest, which was paid in October 1999. As a result of the audit, the net operating loss carryforward was reduced by $95,600. GMI's Combined New York State Franchise Tax Returns for the years 1993 to 1996 are in the process of being audited by The New York State Department of Taxation and Finance. GMI's management does not expect a material adverse outcome from this audit. Subsequent years' Federal, New York State and other tax returns filed by GMI are subject to audit by governmental authorities. NOTE 10 - COMMITMENTS AND CONTINGENCIES Litigation On January 23, 1997, the Company filed in United States District Court for the Southern District of New York an action under the Racketeer Influenced and Corrupt Organizations Act alleging, among other things, that certain defendants conspired to defraud the Company by fraudulently backdating a contract (the"DEC Contract") which awarded exclusive rights to develop a "live" Penthouse internet site to defendant Deluxe Entertainment Corp. ("DEC"). On January 24, 1997 DEC served a demand on the Company for arbitration under the DEC contract on the issues of breach and damages. The DEC Contract provides a minimum damage award of $30 million in addition to incidental, consequential and punitive damages and compensation for lost profits. In July 1998 the United States District Court granted DEC's motion for arbitration. DEC and the Company have mutually agreed to indefinitely postpone this arbitration subject to reinstatement by either party on six months notice to the other. The Company intends to vigorously defend itself in the arbitration should it be reinstated. In the opinion of management, the outcome of these proceedings is not reasonably likely to have a material adverse effect on the Company's financial condition or results of operations. On December 3, 2001, Network Telephone Services ("NTS") filed in Los Angeles Superior Court (the "Court") a complaint against Robert C. Guccione (the Company's Chairman and GMI's principal shareholder), 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 attorneys fees. The Defendants have until April 22, 2002 to file their answer to the complaint. However the Court has ordered the case to mediation, with the mediation to be completed no later than June 17, 2002. The Company is in negotiations with NTS to renew its pay-per-call service and advertising agreements, which renewal could provide for F-20 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 10 (CONTINUED) 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 the opinion of management, the outcome of these proceedings is not reasonably likely to have a material adverse effect on the Company's financial condition or results of operations. There are various 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. Leases The Company leases office space in several cities under operating leases expiring at various dates through March 2009. Rent expense under operating leases was $1,956,000, $1,821,000 and $1,856,000 during the years ended December 31, 1999, 2000 and 2001, respectively. Minimum lease commitments are set forth below:
Year ending December 31, (in thousands) 2002 $ 1,890 2003 1,869 2004 1,864 2005 1,896 2006 1,896 Thereafter 4,271 ------- $13,686 =======
F-21 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 10 (CONTINUED) Letter of Credit In connection with the lease for its corporate office, the Company was required to maintain a standby letter of credit for approximately $1,322,000 at December 31, 2001 for the purpose of collateralizing future lease payments. The letter of credit, which is collateralized by a similar balance in a restricted cash account included in rent security deposits, will be reduced annually in accordance with the lease agreement, but will be required to remain open throughout the life of the lease. The balance in the Company's letter of credit account was $1,396,000 at December 31, 2001. Employee Benefit Plan The Company's employees may participate in a GMI-sponsored employee profit-sharing and deferred compensation 401(k) benefit plan. The plan covers substantially all employees and permits employees to defer up to 15% of their salary up to statutory maximums. The plan also provides for GMI and the Company to make contributions to a profit-sharing fund solely at GMI's or the Company's discretion. There were no Company contributions to the plan for the years ended December 31, 1999, 2000 and 2001. NOTE 11 - UNEARNED REVENUE During 1994 and 1995, the Company received amounts aggregating $1,000,000 and $3,000,000, respectively, relating to two distribution agreements for the Company's products. The advance in 1994 of $1,000,000 represents an incentive to sign a ten-year agreement with a distributor covering the foreign distribution of the Company's magazines. The other advance, totaling $3,000,000, represents an incentive to sign a ten-year agreement with the distributor covering domestic distribution of the Company's magazines. These incentive advances are being recognized as revenue on a straight-line basis over the term of the related contract. During 1999, the Company received amounts aggregating $900,000 and $100,000, respectively, relating to two licensing agreements for domestic sales of the Company's digital video disc ("DVD") versions of its video products. The non-recoupable $900,000 advance represents an incentive to sign a seven-year agreement with a distributor covering domestic distribution of the DVD versions of the Company's video products. This advance is being recognized as revenue on a straight-line basis over the term of the agreement. The $100,000 recoupable advance represents an incentive to sign a seven-year agreement with a distributor covering domestic distribution of the DVD version of a full-length movie owned by the Company. This advance was recognized as revenue as the Company's products were sold through the distributor during 1999 and 2000. F-22 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 11 (CONTINUED) During 2000, the Company received a recoupable advance in the amount of $500,000 which represents an incentive to sign a seven-year licensing agreement with a distributor covering foreign distribution of the DVD versions of the Company's video products and worldwide distribution of the videocassette versions of the Company's video products. This advance was recognized as revenue as the Company's products were sold through the distributor during 2000 and 2001. NOTE 12 - RELATED PARTIES Included in the accompanying statements of operations are allocated expenses for use by the Company of facilities owned by affiliated companies. Rent expense payable to affiliated companies was $542,000, $540,000 and $571,000 for the years ended December 31, 1999, 2000 and 2001, respectively. On November 26, 1993, the Company entered into a Property and Salary Allocation Agreement (the "Agreement") with GMI and an affiliate of GMI, pursuant to which the Company is charged for the cost of utilizing facilities owned by GMI and an affiliate of GMI. The charges are based upon an estimate of the portion of the executive offices used by the Company and the cost of utilizing comparable facilities as determined by the nonemployee members of the Board of Directors of the Company. The Agreement also provided that the Company is charged for the salary of the Chairman of the Board of the Company, which is paid by GMI. The amount of salary charged to the Company is based upon an estimate of the time devoted to Company matters. In 2001, 2000 and 1999, the Company reimbursed GMI in the amounts of approximately $1,295,000, $1,850,000 and $1,530,000, respectively, for the allocated amounts of the chairman's salary. On November 26, 1993, the Company entered into an Expense Allocation Agreement (the "Agreement") with GMI and its subsidiaries, which requires the Company to pay certain shared common indirect expenses. Under the Agreement, GMI and its subsidiaries are required to reimburse the Company, within 60 days after each quarter-end, for any payments made by the Company on its behalf. 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 Agreement in the near future. The amount of shared common indirect expenses charged to GMI and its subsidiaries is based upon factors determined by management of the Company to be appropriate for the particular item, including relative time commitments, relative number of employees and square footage of space occupied. The amount receivable under the Property and Salary Allocation Agreement and the Expense Allocation Agreement, which is non-interest bearing, at December 31, 2000 and 2001 was $1,389,000 and $3,805,000(net), respectively, as approximately $2,971,000 was advanced by the Company to GMI and it subsidiaries in 1999, approximately $2,911,000 in 2000 and approximately $3,216,000 in 2001. As discussed more fully in Note 5, on March 27, 2000, the Company received a payment of approximately $795,000 toward this balance through the transfer of the outstanding stock of a subsidiary of GMI whose net assets consist of works of art and other collectibles. In 2001, the Company established a reserve of $800,000 against an amount due from GMI and its subsidiaries as collectibility is not fully assured. F-23 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 12 (CONTINUED) The Company has an unsecured loan receivable in the amount of $1,086,000 from an entity which is owned by GMI's principal shareholder, which amount has been fully reserved at December 31, 2001 as collectibility is not assured. In October 1997, GMI's principal shareholder was granted a loan in the amount of $1,200,000 from NTS, a company that had simultaneously entered into an agreement with the Company to provide services for the Company's pay-per-call business. Upon the refinancing of the Company's Senior Secured Notes in March 2001, the principal shareholder defaulted on the repayment which resulted in NTS applying monies due the Company from its pay-per-call business towards the repayment of this loan. As more fully described in Note 10 , NTS filed suit in December 2001 regarding this matter. At December 31, 2001, the loan balance was approximately $887,000. The Company had $1,000,000 of loans receivable as of both December 31, 2000 and 2001, from GMI's principal shareholder, pursuant to a promissory note. Such loan bears interest at 11% per annum and is due on December 31, 2002. Included in prepaid expenses and other current assets as of December 31, 2001 are approximately $418,000 of receivables from KC Publishing, Inc., a company owned by the Company's former President and Chief Operating Officer. The Company has established a full reserve against these receivables as collectibility is not assured. NOTE 13 - 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 and until March 1999, the publication of four specialty automotive magazines. From December 1999 to October 2000, the Company also published Mind and Muscle Power Magazine. 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, starting in 2001, the sale of adult-oriented consumer products through the Company's online store. The entertainment segment of the Company provides a number of adult-oriented entertainment products and services, including pay-per-call telephone lines, digital video discs ("DVD's"), videocassettes and pay-per-view programming. F-24 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 13 (CONTINUED)
Corporate and reconciling Publishing Online Entertainment items Consolidated ------------------------------( in thousands)------------------------------ 2001 REVENUES FROM CUSTOMERS $52,713 $9,827 $2,893 $65,433 DEPRECIATION AND AMORTIZATION 502 82 16 600 INCOME (LOSS) FROM OPERATIONS 13,529 5,870 1,212 (13,284) 7,327 DEBT RESTRUCTURING EXPENSES 9,579 9,579 INTEREST EXPENSE 356 7,647 8,003 INTEREST INCOME 289 289 SEGMENT PROFIT (LOSS) BEFORE INCOME TAXES 13,173 5,870 1,212 (30,221) (9,966) SEGMENT ASSETS 12,341 237 1,056 12,152 25,786 CAPITAL EXPENDITURES 74 56 130 2000 Revenues from customers $59,874 $12,840 $3,287 $76,001 Depreciation and amortization 602 76 36 714 Income (loss) from operations 14,424 8,082 1,806 (12,475) 11,837 Interest expense 461 6,404 6,865 Interest income 495 495 Segment profit (loss) before income taxes 13,963 8,082 1,806 (18,384) 5,467 Extraordinary gain, net of income taxes 571 571 Segment assets 17,537 216 1,112 13,947 32,812 Capital expenditures 153 79 232 1999 Revenues from customers $62,213 $12,774 $3,824 $78,811 Depreciation and amortization 664 192 85 941 Income (loss) from operations 5,594 7,230 1,159 (14,827) (844) Gain on sale of Automotive Magazines 30,657 30,657 Interest expense 300 7,669 7,969 Interest income 762 762 Segment profit (loss) before income taxes 35,951 7,038 1,351 (21,734) 22,606 Extraordinary gain, net of income taxes 671 671 Segment assets 17,059 188 1,264 11,793 30,304 Capital expenditures 610 25 3 638
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, debt restructuring expenses (in 2001) and extraordinary gains, net of income taxes (in 2000 and 1999), resulting in the segment profit (loss) shown. Corporate and reconciling items included in segment assets include all cash, deferred debt issuance costs, loan to shareholder and loan to affiliated company. F-25 General Media, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001 NOTE 13 (CONTINUED) The market for the Company's products is worldwide; however 90% of the Company's revenue is derived from U.S.-based sources. NOTE 14-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. The Company does not believe that this statement will have a meterial effect on the Company's financial statements. Certain provisions of The Emerging Issues Task Force pronouncement EITF 01-9, "Accounting for Consideration Given by the Vendor to a Customer(Including a Reseller of the Vendor's Products)", are effective for fiscal periods beginning after December 15, 2001. The Company is evaluating the impact that this pronouncement will have on the Company's financial statements as it relates to retail display allowances. F-26 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors GENERAL MEDIA, INC. AND SUBSIDIARIES In connection with our audits of the consolidated financial statements of General Media, Inc. and Subsidiaries, referred to in our report dated March 8, 2002, we have also audited Schedule II as of December 31, 1999, 2000 and 2001, and for each of the three years in the period ended December 31, 2001. In our opinion, this schedule presents fairly, in all material respects, the information set forth therein. GRANT THORNTON LLP New York, New York March 8, 2002 S-1 General Media, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2001, 2000 and 1999 (amounts in thousands)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions -------------------------------- Charged to Balance at Charged to other Balance at beginning costs and accounts - Deductions - end of Description of year expenses describe describe year ----------- ------------ ------------ ------------ -------------- -------------- YEAR ENDED DECEMBER 31, 2001 ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 1,301 $ 943 $ 392(a) $1,852 ALLOWANCE FOR INTERCOMPANY AND ======= ======= ====== ====== RELATED PARTY NOTES $ -- $ 1,886 $ -- $1,886 ======= ======= ====== ====== Year ended December 31, 2000 Allowance for doubtful accounts $ 1,122 $ 427 $ 248(a) $1,301 ======= ======= ====== ====== Year ended December 31, 1999 Allowance for doubtful accounts $ 918 $ 724 $ 520(a) $1,122 ======= ======= ====== ======
(a) Accounts written off, net of recoveries. S-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAL MEDIA, INC. By: /s/ Robert C. Guccione March 28, 2002 ------------------------------------------------ Robert C. Guccione, Chairman of the Board, Chief Executive Officer and Publisher (Principal Executive Officer) By: /s/ John D. Orlando March 28, 2002 ------------------------------------------------ John D. Orlando, Senior Vice President- Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert C. Guccione - -------------------------- Chairman of the Board, Chief Executive March 28, 2002 Robert C. Guccione Officer, Publisher and Director /s/ Nina Guccione - -------------------------- Executive Vice President, Assistant March 28, 2002 Nina Guccione Secretary and Director /s/ John D. Orlando - -------------------------- Senior Vice President- Chief Financial March 28, 2002 John D. Orlando Officer and Director /s/ William F. Marlieb Director March 28, 2002 - -------------------------- William F. Marlieb /s/ Phyllis Schwebel Director March 28, 2002 - -------------------------- Phyllis Schwebel /s/ Jerry Siano Director March 28, 2002 - -------------------------- Jerry Siano
S-3 EXHIBIT INDEX
Exhibit Sequential No. Description Numbering ------- ----------- ---------- *3.2 -- By-Laws of the Company. 3.3 -- Amended And Restated Certificate of Incorporation of the Company, filed with the Secretary of State of Delaware on March 29, 2001 (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). *4.2 -- Indenture dated as of December 21, 1993, between the Company and IBJ Schroder Bank & Trust Company, as trustee ("Trustee"), containing, as exhibits, specimens of Series A Notes and Series B Notes. *4.4 -- Security Agreement, dated December 21, 1993, between the Company and Trustee. *4.5 -- Pledge Agreement, dated December 21, 1993, between the Company and Trustee. *4.6 -- Copyright Security Agreement, dated December 21, 1993, between the Company and Trustee. *4.7 -- Trademark Security Agreement, dated December 21, 1993, between the Company and Trustee. 4.8 -- First Supplemental Indenture, dated as of May 19, 1999, among the Company, each of the Subsidiary Guarantors and IBJ Whitehall Bank & Trust, as trustee (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 4.9 -- Second Supplemental Indenture, dated as of March 29, 2001, among the Company, each of the Subsidiary Guarantors and The Bank Of New York, as trustee, containing, as exhibits, specimens of Series C Notes (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 4.10 -- Registration Rights Agreement, dated as of March 29, 2001, between the Company and the holders of the Company's Class A Preferred Stock (incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 4.11 -- Amendment To Security Agreement, dated as of March 29, 2001, among the Company, each of the Subsidiary Grantors and The Bank Of New York, as collateral agent (incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). +*10.1 -- Distribution Agreement, dated September 19, 1977, among Curtis Circulation, Penthouse International, Ltd., Forum International, Ltd., Viva International, Ltd., Penthouse Photo World, Ltd. and Penthouse Poster Press, Ltd.; Amendment No. 1, undated; Amendment No. 2, dated September 8, 1982; Amendment No. 3, dated March 18, 1985; and Amendment No. 4, dated February 1, 1986.
i EXHIBIT INDEX
Exhibit Sequential No. Description Numbering ------- ----------- ---------- *10.8 -- Properties and Salary Allocation Agreement, dated December 21, 1993, among the Company, GMI and Locusts on the Hudson River Corp. *10.9 -- Expense Allocation Agreement, dated December 21, 1993, between the Company, GMI and the Other GMI Subsidiaries. *10.10 -- Tax Sharing and Indemnification Agreement, dated December 21, 1993, among the Company, GMI and the Other GMI Subsidiaries. +10.11 -- Circulation Subscription Fulfillment Services Agreement, dated September 15, 1994, between Palm Coast Data, Ltd., Penthouse International, Ltd., Omni Publications International, Ltd., Longevity International, Ltd., Four Wheeler Publishing, Ltd., Stock Car Racing Publications, Inc., Open Wheel Publications, Inc., Super Stock Publications, Inc., Forum International, Ltd. and Variations Publishing International, Ltd.; Amendment, dated September 16, 1994 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 -- Agreement of Lease between M393 Associates LLC and General Media, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.15 -- Amendment To Distribution Agreement, dated November 8, 1995, among Curtis Circulation Company, Penthouse International, Ltd., Forum International, Ltd., Four Wheeler Publishing, Ltd., Penthouse Letters, Ltd., Omni Publications International, Ltd., Variations International, Ltd., Girls Of Penthouse Publications, Inc., Longevity International, Ltd., Hot Talk Publications, Ltd., Stock Car Racing Publishing, Ltd., Super Stock And Drag Racing Illustrated Publishing, Ltd., and Open Wheel Publishing, Ltd. ++10.16 -- Printing Agreement, dated October 12, 2001, among Quebecor World, Inc. and General Media Communications, Inc. (to print Penthouse, Girls of Penthouse and Penthouse Letters). ++10.17 -- Printing Agreement, dated April 26, 2001, between Transcontinental Printing and General Media Communications, Inc. (to print Penthouse - Canadian Version, Forum, Variations and Forum and Variations Specials 12.1 -- Computation of ratio of earnings to fixed charges. 21.1 -- Subsidiaries of the Company.
------------------ - - Previously filed with Registration Statement No. 33-76176 on Form S-4, and incorporated herein by reference to such Registration Statement. + Confidential treatment has been granted with respect to certain information contained in this exhibit. ++ Confidential treatment has been requested with respect to certain information contained in this exhibit. ii EX-10.15 3 y58770ex10-15.txt AMENDMENT TO DISTRIBUTION AGREEMENT EXHIBIT 10.15 AMENDMENT TO DISTRIBUTION AGREEMENT WHEREAS, Curtis Circulation Company ("Curtis") and Publisher (as hereinafter defined) entered into that certain Distribution Agreement, dated September 19, 1977 (as thereafter amended, modified and supplemented, the "Distribution Agreement"); and WHEREAS, on December 17, 1992, Curtis and General Media Publishing Group, Inc. entered into a letter agreement (the "Letter Agreement") relating to, among other things, the payment of interest by Publisher on certain amounts due under the Distribution Agreement; and WHEREAS, on February 28, 1995, Curtis and Omni Publications International, Ltd., Longevity International, Ltd. and General Media International, Inc. ("GMII") entered into an Overadvance Agreement (the "Overadvance Agreement"); and WHEREAS, Curtis and Publisher intend, among other things, to (i) reaffirm and restate certain terms and conditions of the Distribution Agreement, the Overadvance Agreement and the Letter Agreement, (ii) extend the term of the Distribution Agreement and (iii) enact certain additional modifications to the terms and conditions of the Distribution Agreement, and the Overadvance Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Parties. The first unnumbered paragraph of the Distribution Agreement is hereby amended in its entirety to read as follows: Between CURTIS CIRCULATION COMPANY, 433 Hackensack Avenue, Hackensack, New Jersey 07601 (hereinafter called "Curtis"); and PENTHOUSE INTERNATIONAL, LTD., FORUM INTERNATIONAL, LTD., FOUR WHEELER PUBLISHING, LTD., PENTHOUSE LETTERS, LTD., OMNI PUBLICATIONS INTERNATIONAL, LTD., VARIATIONS INTERNATIONAL, LTD., GIRLS OF PENTHOUSE PUBLICATIONS, INC., LONGEVITY INTERNATIONAL, LTD., HOT TALK PUBLICATIONS, LTD., STOCK CAR RACING PUBLISHING, LTD; SUPER STOCK AND DRAG ILLUSTRATED PUBLISHING, LTD. and OPEN WHEEL PUBLISHING, LTD., each having an office at 277 Park Avenue, New York, New York, 10172-0003 (collectively, "Publisher"). 2. The Distribution Agreement. The terms and conditions of the Distribution Agreement, as amended herein, shall be in full force and effect for the territories of the United States of America and Canada. To the extent that any provision of the Distribution Agreement and the Overadvance Agreement shall be in conflict with one or more of the provisions of the Amendments to those agreements (the "Amendments"), the provision(s) of these Amendments shall control in all respects. 3. The Overadvance and Letter Agreements. The terms and conditions of the Overadvance Agreement and the Letter Agreement shall remain in full force and effect, with the following modifications: the Overadvance Agreement shall be hereby modified and amended by the deletion of the following language: "or (iii) a sale of the stock or the titles of OMNI and/or LONGEVITY." which language appears on the second page of the Letter Agreement at the end of the third full paragraph in the letter. In addition, the word "or" shall be inserted between the phrases "(i) a public offering or private sale of stock, "or" (ii) notice of termination of the Distribution Agreement..." 2 4. Term; Renewal. (a) The term of the Distribution Agreement shall be for a period of ten (10) years from the date hereof, covering all issues of the Publications (as hereinafter defined) with "On-Sale Dates" within such period. (b) The Distribution Agreement shall be automatically renewable for additional one (1) year terms, unless advance written notice of termination is given by either party to the other at least one (1) year prior to the commencement of the following renewable term. 5. Overadvance. Upon execution of this Amendment, Curtis shall advance to Publisher the sum of $3.0 million, as an overadvance (the "Overadvance") pursuant to section 11 of the Distribution Agreement, against all amounts due or which may become due, to Publisher from Curtis under the terms of the Distribution Agreement. The obligation of Publisher to repay the Overadvance shall be reduced and forgiven over the term of the Distribution Agreement (as amended hereby) at a rate of $300,000 per year for a period of ten (10) years from the date hereof. Upon the termination of the Distribution Agreement for any reason at any time prior to Nov. 8, 2005, or the occurrence of an event of default that entitles Curtis to terminate the Distribution Agreement, any portion(s) of the Overadvance for which Publisher's obligation to repay has not been reduced and forgiven shall be deemed to be an overpayment within the meaning of Section 11 of the Distribution Agreement, and Curtis may exercise any and all rights set forth in Section 11 of the Distribution Agreement against Publisher, including rights of offset, recoupment and deduction, for all such portion(s) of the Overadvance as of the date of such 3 termination. Should OMNI or LONGEVITY Magazine be closed or sold during the term of this Agreement, the Agreement shall terminate as it pertains to those magazines without any requirement of partial or complete repayment by Publisher. 6. Publications. Curtis is the exclusive distributor in the Untied States of America and Canada of all publications published by Publisher and shall be the exclusive distributor for Publications which may be hereafter acquired or published by Publisher, and which are placed on sale during the term of the Distribution Agreement (collectively, the "Publications"). 7. Competing Periodicals. Section 18 of the Distribution Agreement shall be, and hereby is, omitted and eliminated in its entirety. 8. Cure Period. Notwithstanding anything to the contrary contained in the Distribution Agreement, upon the occurrence and continuance of an event of default under the Distribution Agreement by Curtis for a period of one hundred eighty (180) days, Publisher shall have the right (but not the obligation) to terminate the Distribution Agreement upon thirty (30) days written notice to Curtis; provided, however, that if Publisher fails to give written notice to Curtis of the occurrence of an event of default within ninety (90) days of such occurrence, such event of default shall be deemed waived and Publisher shall have no right to terminate the Distribution Agreement as a result of such event of default. 9. Sale of Publications. (a) If Publisher wishes to sell, assign, transfer or otherwise dispose of its interest in any Publication(s) to any third party at any time during the term of the Distribution Agreement other than OMNI or LONGEVITY magazines, it shall comply with the terms and provisions of this paragraph 9. 4 (b) It shall be a condition to any such disposition that such third party shall enter into a new distribution agreement with Curtis for such Publication(s) (each, a "New Agreement"), and Curtis agrees that it will enter into such New Agreement with such third party, which such New Agreement shall be on the same terms and conditions as the Distribution Agreement, and shall expire on the same date as the Distribution Agreement. 10. New Entities. Any new entity that is now or hereafter formed, purchased or otherwise acquired by GMII, General Media, Inc. or any of their respective subsidiaries or affiliates for the purpose of publishing one or more Publications shall be deemed to be a Publisher within the meaning of the Distribution Agreement, as amended hereby, and shall be bound by the terms and conditions thereof and hereof. 11. Overseas Distribution. (a) Publisher represents and warrants that it has the right to terminate its distribution agreement (the "Worldwide Agreement") with Worldwide Media Service, Inc. ("Worldwide"), which agreement provides for the overseas distribution of certain Publications. At the option of Curtis, which option may be exercised in its sole and absolute discretion on or prior to December 1, 1998, Curtis shall have the right to direct Publisher to give to Worlwide, on or prior to December 31, 1998, notice of the termination of the Worldwide Agreement. (b) Subsequent to the termination of the Worldwide Agreement pursuant to this paragraph 11, Curtis shall distribute the Publications covered by the Worldwide Agreement pursuant to the terms of the Distribution Agreement. Subsequent to the termination of the Worldwide Agreement for any other reason, Curtis shall have the option, in its sole and absolute 5 discretion, to distribute the Publications covered by the Worldwide Agreement pursuant to the terms of the Distribution Agreement. (c) Publisher represents and warrants that, in the event of Publisher's termination of the Worldwide Agreement, a cancellation (or other similar) payment shall be due and owing to Worldwide. If Curtis shall exercise its option to distribute the Publications covered by the Worldwide Agreement, Curtis hereby agrees to reimburse Publisher for any such cancellation (or other similar) payment made by Publisher as a result of a termination of the Worldwide Agreement, in an amount not to exceed $500,000, upon the occurrence of both of the following events: (i) evidence of the need for such cancellation payment and the amount thereof, reasonably satisfactory to Curtis and (ii) evidence of payment by Publisher of such cancellation (or other similar) payment. (d) Further, if Curtis shall exercise its option to distribute publications covered by the Worldwide Agreement, Curtis guarantees that it will abide by Publisher's galley delineating allotments to foreign customers chosen by Publisher (provided such customers are not credit risks) of (i) the following individual magazines -- PENTHOUSE, OMNI and LONGEVITY, and (ii) the following groups of magazines aggregated -- adult sophisticate magazines other than PENTHOUSE and automotive magazines. Publisher will notify Curtis within ninety days of any failure to meet the guarantee. (e) The parties hereto agree that, upon a breach of Publisher's obligation to give notice to Worldwide pursuant to paragraph 11(a) above, Publisher shall pay to Curtis or Curtis may set off or recoup from any advances due Publisher under paragraph 11 of the 6 Distribution Agreement the sum of $500,000 as liquidated damages and not a penalty in connection with such breach. (f) Publisher represents and warrants that it presently has a distribution agreement with a licensee for the distribution of certain Publications in Australia and New Zealand. The parties hereto agree that, in the event such distribution agreement is terminated and is not replaced by a similar distribution agreement with such licensee or another licensee, Curtis shall have the option to distribute such Publications in Australia and New Zealand pursuant to the terms of the Distribution Agreement. 12. No Conflicts. Publisher hereby represents and warrants that the ------------- execution, delivery and performance of this Amendment with not violate any provisions of any agreement or other contractual obligation of Publisher. 13. Entire Agreement; Binding Effect. The Distribution Agreement and --------------------------------- the Overadvance Agreement, as amended by these Amendments, and the Letter Agreement set forth the entire understanding of the parties with respect to the distribution of the Publications and shall be binding on the parties, their respective successors and assigns; and, in particular, the Distribution Agreement shall be binding upon any transferors, successors or assigns of Publisher who shall publish any of the Publications, it being the intent of the parties that the Distribution Agreement run with and apply to all Publications, except as otherwise provided herein, with respect to OMNI and LONGEVITY magazines. 7 IN WITNESS WHEREOF, the parties hereto execute this agreement the 8 day of Nov., 1995. CURTIS CIRCULATION COMPANY By: /s/ Joseph M. Walsh, Chairman & CEO _________________________________________ Joseph M. Walsh Chairman and Chief Executive Officer LONGEVITY INTERNATIONAL, LTD. PENTHOUSE INTERNATIONAL, LTD. FORUM INTERNATIONAL, LTD. FOUR WHEELER PUBLISHING, LTD. VARIATIONS INTERNATIONAL, LTD. GIRLS OF PENTHOUSE PUBLICATIONS, INC. SUPER STOCK AND DRAG ILLUSTRATED PUBLISHING, LTD. OPEN WHEEL PUBLISHING, LTD. PENTHOUSE LETTERS, LTD. OMNI PUBLICATIONS INTERNATIONAL, LTD. HOT TALK PUBLICATIONS, LTD. STOCK CAR RACING PUBLISHING, LTD. THE GENERAL MEDIA GROUP, INC. GENERAL MEDIA INTERNATIONAL, INC. GENERAL MEDIA GROUP SERVICES, INC. By: /s/ Robert C. Guccione _________________________________________ Robert C. Guccione Chairman, Group Publisher and Chief Executive Officer /s/ William F. Marlieb _________________________________________ William F. Marlieb President, Publishing Group 8 EX-10.16 4 y58770ex10-16.txt PRINTING AGREEMENT EXHIBIT 10.16 ------------- CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED INFORMATION ON SCHEDULES A, B, D1, D2, E, F-1, F-2 AND G PRINTING CONTRACT BETWEEN: Quebecor World, Inc. - -------- "The Printer" AND: General Media Communications, Inc. - ---- "The Customer" This contract is dated as of October 12, 2001 and shall become effective on September 1, 2001, and sets forth the terms and conditions by which Quebecor World, Inc. a corporation of Quebec, Canada, having its head office at 612 St. Jacques Street, Montreal Quebec, H3C 4M8 (hereinafter referred to as the "Printer"), shall supply the products and services specified hereinafter to General Media Communications Inc., a corporation of the State of New York, U.S.A., having its head office at 11 Penn Plaza, 12th Floor, New York, NY 10001, USA (hereinafter referred to as the "Customer"). THE PARTIES HERETO AGREE AS FOLLOWS ----------------------------------- TERMS AND CONDITIONS OF CONTRACT -------------------------------- 1.0 WORK UNDERTAKEN --------------- 1.1 Customer retains the services of the Printer to print the following publications: The U.S. Edition of Penthouse Magazine, Girls of Penthouse and Penthouse Letters (each a "Magazine"; collectively the "Magazines"), commencing with the December, 2001, editions. Printer hereby undertakes to perform all services necessary to print, bind, package and ship the Magazines on a monthly basis in accordance with the Customer's specifications as communicated in writing from time to time and as may be set forth in the schedules to this Contract. Such services shall include, but not be limited to a. Preparation, CTP plate making, offset make ready, offset printing, and the furnishing of ink. b. Binding and trimming. c. Newsstand bundling. d. Delivering F.O.B. Printer's dock the copies of the Magazines to be shipped by truck or rail car. Printer shall arrange, on behalf of Customer, for contract carrier to transport the Magazines from dock, if requested by Customer, and Customer shall take payment for all such charges directly to the carrier. 1.1.1 Notwithstanding any other actual or apparently conflicting language in this Contract a. Printer agrees to produce high quality, commercially acceptable Magazines in line with the standard of quality hereinafter defined, unless defective original materials are furnished or a violation of process limitations is involved. Without limitation of the obligation of the Printer to take all its usual precaution in relation to the curing of any such defect, Printer shall use its best efforts to inform Customer of such defects in time for correction and consult with Customer on the solution to the problem of such defective materials. 1 b. Countersigned, bound copies of Magazine acceptable to PUBLISHER and Printer will be retained by both Customer and Printer for use as the standard of quality. 1.2 This contract shall apply exclusively to the printed products mentioned in Section 1.1 hereof. Any other products published by the Customer, which are not included herein, shall be negotiated between the Printer and the Customer. 1.3 Customer will supply the paper to print the Magazines in accordance with the paper usage charts, which are attached as Schedules C and H. Printer shall furnish to Customer no later than the 15th of each month a written accounting of all paper received from Customer and consumed during the previous month and all of the remaining stocks. Printer shall take a physical inventory every six months during the term of this Contract and shall promptly supply the results in writing to Customer, which may audit such inventory report at any time upon four (4) business days' notice to Printer. Should the paper consumption exceed that set forth in Schedules C and H, Printer shall upon completion of such accounting, at Printer's option, reimburse Customer for such excess either in kind or at the same price per pound, at a rate equal to the average cost of said paper during the accounting period. In the event of a net under consumption, Customer agrees to pay the Printer an amount equal to one-half of the cost of the paper so under consumed, computed at the same rates. The value of under consumption, if any, of one kind or weight of the paper shall be used as a credit against over consumption, if any, of other kinds/weights of paper. Printer shall store up to three months' paper requirements for the printing of the three (3) Magazines on its premises, at no cost to Customer. 1.4 Printer agrees to produce and maintain high quality standards of reproduction consistent with industry SWOP standards. Printer shall bear the cost (including paper and ink) of make-goods caused by any error or omission attributable to Printer. Failure to correct errors within sixty (60) days after receipt of written notification, shall be considered as breach of the terms and conditions of this contract and will entitle Customer to cancel this contract on thirty (30) days' notice. 2.0 PRICE AND PAYMENT ----------------- 2.1 The prices set forth in Schedules A, B, D, E, F and G include CTP plate making, printing, binding, and mail preparation work and all other services necessary to produce print, bind, package and ship the three (3) Magazines as described in section 1.1. 2.2 Customer shall be invoiced based on the number of copies ordered and delivered as described in Section 3.1. 2.3 The price structure in Schedules A, B, D, E, F and G shall be effective on September 1, 2001 and for a period of one (1) year thereafter, except for the changes described in section 2.4. 2.4 Should there be an increase or reduction in the price of paper, ink, labor and manufacturing, Printer may increase or reduce the prices as follows: 2.4.1 The increase in the Customer's costs shall be no greater than the actual increase in the cost incurred by Printer. 2.4.2 Customer shall be notified fifteen (15) days in advance. 2.4.3 Printer shall provide all supporting documentation with the notification provided for in section 2.4.2 above. 3.0 TERMS AND CONDITIONS -------------------- 2 3.1 The term of this agreement shall be five (5) years, unless sooner terminated as provided below. This agreement shall be effective beginning September 1, 2001 (effective date) and expire August 31, 2006. 3.2 Customer shall issue a purchase order for each issue including the print run, the nature of the work, the final quantities and provide shipping documentation. Customer shall issue this purchase order to the Printer no later than fifteen (15) days prior to the scheduled press run start as agreed on by the parties. 3.3 Printer shall submit one invoice for each issue. The invoice shall specify in detail satisfactory to Customer the services performed and the prices charged. The terms are net thirty (30) days. The date of the invoice will be the last day of the shipping cycle. The last day of shipping shall be five (5) working days after the ship date of the attached production schedules to Newsstand Distributors. 3.3A (a) The production schedule for the year 2001-02 is contained in Schedule I, attached hereto and made part hereof. The production schedule may be amended or established for subsequent years as mutually agreed upon by both parties. (b) Customer agrees to provide any Customer-furnished material in accordance with the schedule mutually agreed upon by the parties. Where the Customer does not adhere to the production schedule, final delivery date(s) and/or prices will be subject to re-negotiation. 3.4 Production schedules shall be prepared and approved by both parties. 3.5 Printer will store 5,000 finished copies of each of the three (3) Magazines for ninety (90) days following the on-sale date at no additional cost to Customer; thereafter, such copies shall be shipped at Customer's direction and expense to a facility designated by Customer. Failing Customer's instructions the Printer may destroy such copies but will give Customer fifteen (15) days' notice before doing so. 3.6 In furtherance and not in derogation of Printer's obligation of due care toward Customer's property, Printer shall cover by insurance the values added by Printer in the form of raw materials, labour, and overhead, against fire, extended coverage perils, vandalism, malicious mischief and sprinkler leakage. Customer will similarly insure its property while on Printer's premises. Customer will also insure its paper throughout the printing process (except waste paper). All waste paper shall become Printer's property. 3.7 Risk of loss or damage to Customer and title to the finished work shall pass to the Customer upon delivery to a common carrier F.O.B. Printer's shipping dock, or delivery into storage, whichever first occurs. 3.8 Neither the three (3) Magazines nor any material furnished by the Customer shall be subject to any lien(s) of Printer or Printer's creditors of any kind or nature whatsoever, and Printer hereby waives any rights under statute or otherwise to assert any liens on or otherwise distrain Customer's property, work in progress or the finished product. Printer will take all steps prescribed by law to protect Customer's interests as they may appear upon any levy or attempted levy by Printer's creditors on the Customer's property or any finished work or work in progress; Printer shall expeditiously seek to remove any such lien and in any event shall hold Customer entirely harmless therefrom. 3.9 Printer shall use its best efforts to keep confidential the contents of each issue of the three (3) Magazines prior to general public distribution. 3.10 Customer may terminate this agreement as to any Magazine effective on written notice if it discontinues publication of such Magazine. 3 3.11 Customer shall be entitled to terminate this Agreement, notwithstanding the provisions of paragraph 3.1 above: 3.11.1 Upon written notice, if Printer consistently falls below the standard of quality required by paragraph 1.1 above as provided in paragraph 1.4 above; and subsequent to 1.1.1B. 3.11.2 Upon the happening of an event of force majeure which prevents or substantially hinders Printer's full performance hereunder (force majeure being defined as an event the non-occurrence of which is relied upon by both parties for the performance of the contract and includes but is not limited to: strikes, war, fire, flood, Acts of God and any other unforeseen events of the same or a different nature not necessarily within the control of either party), Printer shall have the right to remove the work (as to any or all Magazines) to another facility ("Printer's Facility") provided that within three business days of the occurrence of the event of force majeure Printer provides assurances satisfactory to Customer that the work can be performed at Printer's Facility to the same quality standards and upon the same price terms as herein; failing which, Customer shall have the right to remove the work to another printer of its own choosing for the duration of the event of force majeure. If the event of force majeure continues more than forty-five (45) days, and (i) Printer has removed the work to Printer's Facility as provided above, then if Customer is satisfied with the work of Printer's Facility, Printer has the option of continuing this Agreement in full force and effect and upon all terms and conditions hereof, as to all Magazines so removed, except that the work be performed at Printer's Facility; (ii) Customer has removed the work to a printer of its own choice as provided above, then Customer may cancel this Agreement as to any or all Magazines so removed. 3.11.3 As specified in paragraph 5.2 below. 3.12 Either party shall have the right to terminate this agreement for a material breach which remains uncured more than thirty (30) days after written notice and demand to cure is received specifying the breach; such termination shall be by written notice effective thirty (30) days after receipt; provided always that if in Customer's reasonable business judgement Printer's breach substantially impairs Customer's ability to distribute its Magazines on time Customer shall have the right immediately to move the work elsewhere as to any or all Magazines. In any event, upon termination for any cause whatsoever Printer will cooperate fully with Customer in the transition process to a new Printer. 3.13 In the event either of the parties should become insolvent or bankrupt, the other party shall be entitled to terminate this Contract on no less than thirty (30) days' written notice to the other party or to its estate or successor. 3.14 Subject to the remainder of this agreement, upon termination, Customer shall not be liable for any of the Printer's costs: (a) incurred or ordered after notice; (b) which can be cancelled at no loss to the Printer, or (c) in excess of the out-of-pocket loss to the Printer of any unused items sold to other customers or third parties or returned to suppliers. In any event, Printer's costs will only include normal manufacturing expenses. 3.15 Upon the sale of the Magazines, or any one of them, Customer will attempt to have the purchaser continue this Agreement for any unexpired term. 4.0 LIABILITY FOR CONTENT --------------------- 4 4.1 Customer will indemnify and hold Printer harmless from and against any claims, demands, suits, actions, costs, loss or judgements, including reasonable attorneys' fees, for libel, defamation of character, copyright or trademark infringement, invasion of right of privacy or publicity, patent infringement or invasion of any other right, by any person, firm or entity against the Printer not attributable to Printer's fault and arising out of any material delivered by the Customer or supplied on its behalf to Printer and used by Printer according to Customer's instructions in producing the three (3) Magazines, provided that such indemnity shall not include consequential or exemplary damages or lost profits. 4.2 In like manner Printer shall indemnify and hold Customer harmless from and against any claims, demands, suits, actions, costs, loss or judgements, including reasonable attorneys' fees, for libel, defamation of character, copyright or trademark infringement, invasion of right of privacy or publicity, patent infringement or invasion of any other right, by any person, firm or entity against Customer arising out of any act or omission of Printer in performing its services hereunder, provided, however that such indemnity shall not exceed the value of the contract and shall not include liability for consequential or exemplary damages or lost profits. 4.3 No indemnification promised in sections 4.1 or 4.2 above shall be effective unless the indemnified party shall have given prompt notice of any indemnifiable claim to the indemnifying party. Thereafter the indemnifying party shall at its sole cost and expense defend the claim by counsel of its choosing reasonably acceptable to the indemnified party or at its option instruct the indemnified party to defend but at the indemnifying party's expense. Nothing herein shall prevent any indemnified party from retaining its own counsel at its own expense to advise it or to elect to defend with its own counsel but in such event such defense shall be at the indemnified party's sole expense and risk of liability. No indemnifying party shall conclude a settlement binding on an indemnified party absent the consent of the indemnified party. Should an indemnified party elect to settle or compromise any claim solely as to itself without permission of the indemnifying party, the indemnifying party shall thereafter have no further obligations toward the indemnified party. 5.0 DISPUTED INVOICES 5.1 Customer shall not be obligated to pay any portion of any invoice, which it disputes in good faith. Customer shall have sixty (60) days from the receipt of such invoice to notify the Printer in writing of any items which it disputes and shall specify its grounds therefor. Thereafter the parties shall attempt during the next thirty (30) days to attempt to resolve the dispute among themselves in good faith. In no event shall dispute of an invoice by Customer be deemed a breach of this Contract or entitle Printer to stop or distrain work. 5.2 Notwithstanding anything in this Contract to the contrary, Printer's continued failure, for any reason whatsoever except events of force majeure, to produce the three (3) Magazines or to produce them timely in accordance with the production schedule submitted by the Customer and agreed upon by Printer, shall entitle Customer, on thirty (30) days' notice, to terminate this Contract and take the work elsewhere. In case of events of force majeure paragraph 3.11.2 will apply. 6.0 MISCELLANEOUS 6.1 Any amendments to or modifications of this contract or any term or condition hereof shall only be valid if in writing signed both by Printer and Customer. This Contract shall not be assigned by either party without the written consent of both parties, except that either party may assign it to a wholly owned subsidiary or to an affiliate of either party which is under its common ownership and control. 6.2 This contract and the rights of the parties to it shall be governed by the law of the State of New York, USA, applicable to contracts made and wholly to be performed therein without regard to the conflicts 5 of laws rules thereof. No lawsuit arising out of the execution, formation, terms, performance or breach of this Contract shall be brought except in courts physically located in New York County, New York, and the parties hereto expressly consent to the personal jurisdiction of such courts over all such litigation and all matters whatsoever relating to or arising out of this Contract. This Contract and the attached schedules contain the sole understanding and agreement of the parties concerning the subject matter hereof, all prior negotiations, conversations, understandings and agreements, whether oral or written, being merged herein. 6.3 Notice where required shall be given to each party at its address first set forth above, or to its telefacsimile number, and shall be effective on receipt if by telefacsimile or by express service which requires a signed receipt, and otherwise three days from the date of mailing. Regular mail shall be sent first-class, postage prepaid. 7.0 SCHEDULES --------- 7.1 This contract consists of this document and the following annexed schedules. Schedule A: Presswork, PENTHOUSE Magazine Schedule B: Bindery and Bundling, PENTHOUSE Magazine Schedule C(C-1, C-2, C-3): Paper Consumption, PENTHOUSE Magazine Schedule D(D-1, D-2): Mailing and Polybagging, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS and PENTHOUSE Magazines Schedule E: Presswork, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS Magazines Schedule F-1: Bindery (Perfect) and Packaging, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS Magazines Schedule F-2: Bindery (Saddle Stitched) and Packaging, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS Magazines Schedule G: Miscellaneous, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS Magazines Schedule H(H-1, H-2): Paper Consumption, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS Magazines Schedule I: Production Schedules 2001/02, GIRLS OF PENTHOUSE/PENTHOUSE LETTERS/PENTHOUSE Magazines IN WITNESS WHEREOF the parties have signed this 12 day of October, 2001. GENERAL MEDIA COMMUNICATIONS, INC. QUEBECOR WORLD, INC. /s/John D. Orlando /s/Richard Tremblay - ------------------------ ----------------------- Name: John D. Orlando Name: Richard Tremblay Title: Senior VP/C.F.O. Title: President, East Group /s/Harold W. Halpner /s/Jean Labelle - ------------------------ ----------------------- Name: Harold W. Halpner Name: Jean Labelle Title: Executive VP/Manufacturing Title: Vice-President,East Group 6 A PENTHOUSE 2001 PRICE STRUCTURE PRESSWORK DESCRIPTION DESCRIPTION COVER-4 PAGES LITHOD 4/4 INK Coated Gloss 136# Makeready 4-color process (price/Mpp) Running (price/M) 5-color (process & 1 PMS) Cutting Covers (price/M) (price/Mpp) UV Gloss one side (price/M) 6-color (Process & 1 PMS 1 metallic) (price/Mpp) INSERT-6pp single gatefold 4/4 WASH UP Gloss Coated 60# Makeready Makeready-open 5th or 6th unit Running (price/M) TEXT-32pp signature 4/4 (2/16's) INSERT-2pp single sheet 4/4 Gloss Coated 50# Gloss Coated 100# Makeready Makeready Running (price/M) Running (price/M) TEXT-16pp signature 4/4 (1/16's) Gloss Coated 50# Makeready Press stop Running (price/M) Paper change stop Plate change (1/0) (price/plate) TEXT-8pp signature 4/4 (1/8's) Gloss Coated 50# Makeready Running (price/M) TEXT-4pp signature 4/4 (1/4's) Gloss Coated 50# Makeready Running (price/M)
Note: Above prices include all broker fees Issued: June 28, 2001 B PENTHOUSE 2001 PRICE STRUCTURE BINDERY & BUNDLING
DESCRIPTION BINDERY - perfect binding Makeready Run 13-15 sections /M 16-18 sections /M 19-21 sections /M Blow-in cards supplied to our specs. /M Bind-in cards supplied to our specs. /M Reverse lap feed /M Pocket change /pocket NEWSSTAND - BUNDLING 20 copies per bundle /M 25 copies per bundle /M 30-35 copies per bundle /M 40-45 copies per bundle /M Pack Newsstand bundles on pallets /pallet Newsstand Pooling (FOB Plattsburgh) /cwt Fuel surcharge on Pooling Paper Handling /cwt
Note: Above prices include all broker fees. Issued: August 14, 2001 /ADC C-1 PENTHOUSE MAGAZINE PAPER CONSUMPTION
DESCRIPTION Per Min Final Trim Size 8' x 10 3/4' Rollsize Makeready Pounds COVER 4 Pages 25 x 38 Supplied Coated 100# text weight 33.5" 1,568# 46,9# PLATE CHANGES Supplied Coated 100# text weight - - 1/C plate change 33.5" 553# - - 4/C plate change 33.5" 1,107# COVER 4 pages 25 x 38 Supplied Coated 136# text weight 33.5" 2,127# 63,8# PLATE CHANGES Supplied Coated 136# text weight - - 1/C plate change 33.5" 753# - - 4/C plate change 33.5" 1,506# GATELEG 6 pages 25 x 38 Supplied Coated 60# text weight 23,0" 457# 40,7# BODY 25 x 38 Supplied Coated 40# text weight - - 32 pages 33" 920# 147,6# - - 16 pages 33" 824# 73,9# - - 8 pages 33" 911# 36,9# - - 4 pages 33.5" 643# 18,7#
C-2 PENTHOUSE MAGAZINE PAPER CONSUMPTION
DESCRIPTION PER MAIN FINAL TRIM SIZE 8" X 10 3/4" ROLL SIZE MAKEREADY POUNDS PLATE CHANGES Supplied Coated 40# text weight - 1/C plate change 33" 436# - 4/C plate change 33" 872# BODY 25 x 38 Supplied Coated 50# text weight - 32 pages 33" 1,050# 184,6# - 16 pages 33" 1,064# 92,3# - 8 pages 33" 1,071# 46,1# - 4 pages 33.5" 851# 23,4# PLATE CHANGES Supplied Coated 50# text weight - 1/C plate change 33" 545# - 4/C plate change 33" 1,091# BODY 25 x 38 Supplied Coated 60# text weight - 32 pages 33" 1,259# 221,5# - 16 pages 33" 1,277# 110,7# - 8 pages 33" 1,285# 55,4# - 4 pages 33.5" 1,021# 28,1#
C-3 --- PENTHOUSE MAGAZINE PAPER CONSUMPTION
DESCRIPTION Final Trim Size 8" x 10 3/4" Roll size Makeready Per M in Pounds PLATE CHANGES Supplied Coated 60# text weight - -1/C plate change 33" 655# - -4/C plate change 33" 1,309# INSERT 2 pages 25x38 Supplied Coated 100# text weight 33" 1,095# 23,1#
Issued: August 14, 2001 D-1 PENTHOUSE/GIRLS/LETTERS PRICE STRUCTURE MAILING & POLYBAGGING
DESCRIPTION ________________________________________________________________________________ DATA PROCESSING ________________________________________________________________________________ Processing of addresses for printing 4-up Cheshire label, bar coded, letter carrier pre-sorted /M To run start file for pooling /job To run special pressure sensitive labels for /M Supplements minimum ________________________________________________________________________________ MAILING ________________________________________________________________________________ Insert one piece into poly /M Address using cheshire labels, sort, bundle & bag /M Insertion of each additional piece into poly /M/piece Blow-in on the Sitma (on line) /M/piece To manually address P/S labels (with return address and permit) insertion of the piece into 9" x 12" envelope. Seal, sort, bundle & bag /M minimum Supply 9" x 12" envelope /M Delivery to Plattsburgh Post Office /Truck ________________________________________________________________________________ POLYBAGGING LABOUR ________________________________________________________________________________ Insert 1 piece into polybag /M To apply starburst for Mexico /M To nest supplied card into book /M
D-2 PENTHOUSE MAGAZINE / GIRLS/ LETTERS PRICE STRUCTURE - MAILING & POLYBAGGING
DESCRIPTION POLYBAGGING - MATERIAL Supply plastic - 1mm - printed one color black for Printed...in Canada -4.250MM bags (6 months) /M Generic opaque - USPS approved - printed Black/white/silver - 1.25mm based on 1,960,000 bags - 6 months /M Printing 3 colors on clear poly - 3 different News- stand versions - based on 1,240,000 bags - 1.25mm (1 year + 1 year back-up for Penthouse Mag) /M PRE-PRESS & PLATES Client supplies disk with application files We do trapping, file verification, imposition plates, digital blues and color proofs USPS plastic Penthouse Magazine & Penthouse Letters Girls of Penthouse - 2 versions
Issued: August 28, 2001 /ADC E GIRLS OF PENTHOUSE / LETTERS OF PENTHOUSE PRICE STRUCTURE - PRESSWORK
DESCRIPTION DESCRIPTION COVER, 4 pages Litho'd 4/4 INK Supplied Coated 80# or 136# text weight Makeready 4 color procees /Page/M 3 color procees /Page/M Running /M (saddle stitched) 2 color procees /Page/M 1 color black /Page/M Running /M (perfect bound) Cutting /M (perfect bound) Metallic /Page/M PMS color match /Page/M UV Gloss one side /M TEXT, 32pp signature 4/4 as 2/16's TEXT, 16pp signature 4/4 as 1/16's 2-out Supplied Machine Coated 50# text weight Supplied Machine Coated 50# text weight Makeready Makeready Running /M Running /M TEXT, 8pp signature 4/4 as 1/8's 2-out TEXT, 4pp signature 4/4 as 1/4's 4-out Supplied Machine Coated 50# text weight Supplied Machine Coated 50# text weight Makeready Makeready Running /M Running /M MISCELLANEOUS Wash-up on 5th or 6th unit /unit Plate change (1/0) Press stop / Paper change
Note: Above prices include all broker fees Issued: August 14, 2001 F-1 GIRLS of PENTHOUSE / LETTERS of PENTHOUSE Price Structure BINDERY (perfect) & PACKAGING DESCRIPTION BINDERY-perfect binding Makeready Run 6-8 sections /M 9-11 sections /M 12-14 sections /M Blow-in cards supplied to our specs. /M Bind-in cards supplied to our specs. /M Reverse lap feed /M Pocket change /pocket
Note: Above prices include all broker fees. Issued: August 14, 2001 /ADC F-2 GIRLS of PENTHOUSE / LETTERS of PENTHOUSE Price Structure BINDERY (saddle stitched) & PACKAGING DESCRIPTION BINDERY-saddle stitched Makeready Run 7-9 sections /M 10-12 sections /M 13-15 sections /M 16-18 sections /M Blow-in cards supplied to our specs. /M Blind-in cards supplied to our specs. /M Reverse lap feed /M Pocket change /pocket
Note: Above prices include all broker fees. Issued: August 14, 2001 /ADC G --- GIRLS of PENTHOUSE/LETTERS of PENTHOUSE MISCELLANEOUS DESCRIPTION Paper handling /cwt NEWSSTAND-BUNDLING 20 copies per bundle /M 25 copies per bundle /M 30-35 copies per bundle /M 40-45 copies per bundle /M Pack newsstand bundles on pallets /pallet Newsstand Pooling (FOB Plattsburgh) /cwt Fuel surcharge on Pooling
Note: Above prices include all broker fees. Issued: August 14, 2001 /ADC H-1 GIRLS OF PENTHOUSE / LETTERS OF PENTHOUSE PAPER CONSUMPTION
DESCRIPTION Per Min Final Trim Size 8" x 10 1/2" Roll size Makeready Pounds COVER 4 pages - sheet size 25 x 38 Supplied Coated 80# text weight 33.5" 1,254# 38,3# COVER 4 pages - sheet size 25 x 38 Supplied Coated 136# text weight 33.5" 2,170# 65,1# BODY 25 x 38 Supplied Coated 40# text weight - 32 pages 33" 857# 150,6# - 16 pages 33" 868# 75,3# - 8 pages 33" 874# 37,6# PLATE CHANGES Supplied Coated 40# text weight - 1/C plate change 33" 436# - - 4/C plate change 33" 873# - BODY 25 x 38 Supplied Coated 50# text weight - 32 pages 33" 1,071# 188,3# - 16 pages 33" 1,085# 94,1# - 8 pages 33" 1,092# 47,0# PLATE CHANGES Supplied Coated 50# text weight - 1/C plate change 33" 545# - - 4/C plate change 33" 1,091# -
Issued: August 14, 2001 H-2 GIRLS OF PENTHOUSE / LETTERS OF PENTHOUSE PAPER CONSUMPTION
DESCRIPTION Final Trim Size 7 1/2" x 10 1/2" Per Min Roll size Makeready Pounds COVER 4 pages-sheet size 25 x 38 Supplied Coated 80# text weight 32.5" 1,217# 37,2# COVER 4 pages-sheet size 25 x 38 Supplied Coated 136# text weight 32.5" 2,069# 63,2# BODY 25 x 38 Supplied Coated 50# text weight - - 32 pages 32" 1,039# 182,3# - - 16 pages 32" 1,052# 91,2# - - 8 pages 32" 1,059# 45,6# PLATE CHANGES Supplied Coated 50# text weight - - 1/C plate change 32" 528# - - 4/C plate change 32" 1,058#
Issued: August 14, 2001 I-1 THE GIRLS OF PENTHOUSE 2002
Maps & Manuscripts JANUARY MARCH MAY SPRING JULY BLACK LABEL Due 4 weeks prior to FEBRUARY APRIL JUNE SPECIAL AUGUST SUMMER 4/C Due Date REARVIEW SPECIAL Cover & Pictorial 4/C Due 10/05 11/06 12/18 1/28 3/12 4/17 Late 4/C Due 10/12 11/15 12/27 2/01 3/18 4/24 Balance 4/C 10/18 11/27 1/07 2/07 3/22 4/29 Type Due FINAL TYPE 10/24 12/04 1/11 2/13 3/28 5/03 DISC DUE CRITICAL DATE 10/31 12/11 1/17 3/20 4/04 5/09 FINAL TYPE DISC SHIPS TO PRINTER 11/07 12/18 1/23 2/27 4/10 5/15 Blues (start) 11/15 1/03 1/31 3/07 4/18 5/23 On Press (start) 11/19 1/05 2/04 3/11 4/22 5/27 Bindery (start) 11/24 1/06 2/09 3/16 4/27 6/01 ON-SALE DATE 12/18 1/29 3/05 4/09 5/21 6/25
Maps & Manuscripts SEPTEMBER FALL NOVEMBER BLACK LABEL JANUARY Due 4 weeks prior to OCTOBER SPECIAL DECEMBER WINTER FEBRUARY' 4/C Due Date LEGS SPECIAL 03 Cover & Pictorial 4/C Due 5/21 6/26 7/26 8/28 10/04 Late 4/C Due 5/28 7/01 8/01 9/06 10/11 Balance 4/C 5/31 7/09 8/08 9/12 10/18 Type Due FINAL TYPE 6/07 7/15 8/15 9/19 10/24 DISC DUE CRITICAL DATE 6/13 7/19 8/21 9/25 10/31 FINAL TYPE DISC 6/19 7/24 8/27 10/02 11/06 SHIPS TO PRINTER Blues (start) 6/27 8/01 9/05 10/10 11/14 On Press (start) 7/01 8/05 9/09 10/14 11/18 Bindery (start) 7/06 8/10 9/14 10/19 11/23 ON-SALE DATE 7/30 9/03 10/08 11/12 12/17
8/21/2001 I-2 PENTHOUSE LETTERS 2002
Maps & Manuscripts Due 4 weeks prior to 4/C Due Date JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER ______________________________________________________________________________________________________________________________ Cover & Pictorial 9/18 10/15 11/15 12/12 1/07 2/05 3/05 4/02 4/30 5/17 6/13 4/C Due Late 9/25 10/19 11/19 12/17 1/14 2/12 3/12 4/09 5/07 5/24 6/20 4/C Due Balance 4/C 10/02 10/26 11/27 12/20 1/22 2/19 3/19 4/16 5/14 6/04 7/09 Type Due FINAL TYPE DISC 10/09 11/01 12/04 1/02 1/28 2/26 3/26 4/23 5/21 6/11 7/16 DUE CRITICAL DATE 10/16 11/08 12/11 1/07 2/04 3/05 4/02 4/30 5/29 6/19 7/23 FINAL FILMS 10/23 11/15 12/18 1/14 2/11 3/12 4/09 5/07 6/04 6/27 7/30 SHIPS TO PRINTER Blues (start) 11/01 11/29 1/03 1/24 2/21 3/21 4/18 5/16 6/13 7/11 8/08 On Press (start) 11/03 12/01 1/05 1/26 2/23 3/23 4/20 5/18 6/15 7/13 8/10 Bindery (start) 11/06 12/04 1/06 1/29 2/26 3/26 4/23 5/21 6/18 7/16 8/13 On-Sale Date 12/04 1/01 1/29 2/26 3/26 4/23 5/21 6/18 7/16 8/13 9/10 ______________________________________________________________________________________________________________________________ 8/21/01
Maps & Manuscripts Due 4 weeks prior to 4/C Due Date DECEMBER HOLIDAY JANUARY 2003 ________________________________________________________________________________ Cover & Pictorial 7/15 8/13 9/24 4/C Due Late 7/22 8/20 10/01 4/C Due Balance 4/C 7/29 8/26 10/08 Type Due FINAL TYPE DISC 8/06 9/04 10/16 DUE CRITICAL DATE 8/13 9/12 10/23 FINAL FILMS 8/23 9/24 10/30 SHIPS TO PRINTER Blues (start) 9/05 10/03 11/07 On Press (start) 9/07 10/05 11/09 Bindery (start) 9/10 10/08 11/12 On-Sale Date 10/08 11/05 12/10 ________________________________________________________________________________ 8/21/01
I-3 PENTHOUSE 2002 JUNE JAN FEB MARCH APRIL MAY POY JULY PLAY-OFF ================================================================================================================================== MANUSCRIPTS DUE 4 WEEKS PRIOR TO 8/04 8/14 10/15 11/14 12/20 1/10 2/7 4/C DUE DATE EARLY OFFSET 4/COLOR DUE 9/05 10/05 11/05 12/05 1/10 2/01 3/1 F.O.B. & FEATURE 4/COLOR DUE 9/10 10/12 11/09 12/12 1/17 2/08 3/6 LATE OFFSET 4/COLOR DUE 9/14 10/19 11/14 12/17 1/23 2/13 3/11 FEATURE TYPE, CARTOON FEATURE, HOUSECALL, 9/19 10/25 11/19 12/21 1/28 2/20 3/14 PREVIEW OFFSET TYPE SHIPS TO COMBINE W/4/COLOR 9/24 11/01 11/27 12/27 2/01 2/25 3/19 ================================================================================================================================== LATEST PASTE-UP FINAL PAGINATION DUE 10/01 11/07 11/30 1/04 2/05 3/01 3/22 W/O O/T ================================================================================================================================== CRITICAL DATE 10/10 11/14 12/07 1/11 2/11 3/08 3/28 ================================================================================================================================== PICTORIAL TYPE SHIPS 10/10 11/14 12/07 1/11 2/11 3/08 3/28 ================================================================================================================================== AD/EDIT COMBOS COVER TYPE SHIPS 10/12 11/20 12/13 1/17 2/14 3/14 4/11 OFFSET FILM SHIPS 10/18 11/26 12/19 1/23 2/20 3/20 4/17 US BLUELINES FROM QUEBECOR DUE 10/25 12/06 1/03 1/31 2/28 3/28 4/25 OFFSET ON PRESS COVER ON PRESS 10/27 12/06 1/05 2/02 3/02 3/30 4/27 BINDERY STARTS 10/31 12/12 1/09 2/06 3/06 4/03 5/1 ================================================================================================================================== ON-SALE DATE 11/27 1/08 2/05 3/05 4/02 4/30 5/28 ================================================================================================================================== CANADIAN PAGINATION W/ CORRECTIONS 10/22 12/4 1/2 1/29 2/26 3/25 4/30 COVER W/O UPC & CARTOONS TO INTERNET 10/22 12/4 1/2 1/29 2/26 3/25 4/30 ON-SALE PERIOD 28 28 28 28 28 28 28 HOLIDAYS IN LABOR DAY COLUMBUS DAY THANKSGIVING HANUKKAH MARTIN LUTHER PRESIDENT S PASSOVER PRODUCTION CYCLE ROSH HASHANAH THANKSGIVING HANUKKAH CHRISTMAS KING DAY DAY GOOD FRIDAY REDUCE DAYS ALLOWED TO YOM KIPPUR CHRISTMAS NEW YEAR S EASTER PRODUCE THE ISSUE COLUMBUS DAY 10/1/01
PENTHOUSE 2002 AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER SPECIAL JANUARY ANNIVERSARY ISSUE POY'03 ================================================================================================================================== MANUSCRIPTS DUE 4 WEEKS PRIOR TO 3/4 4/4 5/3 5/24 6/26 7/25 8/14 4/C DUE DATE EARLY OFFSET 4/COLOR DUE 3/25 4/25 5/24 6/21 7/17 8/15 9/4 F.O.B. & FEATURE 4/COLOR DUE 4/2 5/2 5/30 6/28 7/24 8/21 9/11 LATE OFFSET 4/COLOR DUE 4/8 5/6 6/4 7/3 7/30 8/26 9/18 FEATURE TYPE, CARTOON FEATURE, HOUSECALL, 4/12 5/10 6/10 7/11 8/5 9/3 9/25 PREVIEW OFFSET TYPE SHIPS TO COMBINE W/4/COLOR 4/18 5/16 6/14 7/17 8/9 9/9 10/2 ================================================================================================================================== LATEST PASTE-UP FINAL PAGINATION DUE 4/24 5/23 6/21 7/22 8/15 9/13 10/8 W/O O/T ================================================================================================================================== CRITICAL DATE 5/2 5/30 6/28 7/26 8/22 9/19 10/16 ================================================================================================================================== PICTORIAL TYPE SHIPS 5/2 5/30 6/28 7/26 8/22 9/19 10/16 ================================================================================================================================== AD/EDIT COMBOS COVER TYPE SHIPS 5/9 6/7 7/5 8/1 8/28 9/25 10/23 OFFSET FILM SHIPS 5/15 6/12 7/10 8/7 9/4 10/2 10/28 US BLUELINES FROM QUEBECOR DUE 5/23 6/20 7/18 8/15 9/12 10/10 11/7 OFFSET ON PRESS COVER ON PRESS 5/25 6/22 7/20 8/17 9/14 10/12 11/9 BINDERY STARTS 5/29 6/26 7/24 8/21 9/18 10/16 11/13 ================================================================================================================================== ON-SALE DATE 6/25 7/23 8/20 9/17 10/15 11/12 12/10 ================================================================================================================================== CANADIAN PAGINATION W/ CORRECTIONS 5/28 6/25 7/29 8/26 9/24 N/A N/A COVER W/O UPC & CARTOONS TO INTERNET 5/28 6/25 7/29 8/26 9/24 N/A N/A ON-SALE PERIOD 28 28 28 28 28 28 28 HOLIDAYS IN MEMORIAL DAY JULY 4TH JULY 4TH LABOR DAY LABOR DAY COLUMBUS PRODUCTION CYCLE ROSH HASHANAH DAY REDUCE DAYS ALLOWED TO YOM KIPPUR THANKSGIVING PRODUCE THE ISSUE COLUMBUS DAY 10/1/01
PENTHOUSE 2002 FEBRUARY ======================================== MANUSCRIPTS DUE 4 WEEKS PRIOR TO 9/17 4/C DUE DATE EARLY OFFSET 4/COLOR DUE 10/8 F.O.B. & FEATURE 4/COLOR DUE 10/16 LATE OFFSET 4/COLOR DUE 10/22 FEATURE TYPE, CARTOON FEATURE, HOUSECALL, 10/28 PREVIEW OFFSET TYPE SHIPS TO COMBINE W/4/COLOR 11/1 ======================================== LATEST PASTE-UP FINAL PAGINATION DUE 11/6 W/O O/T ======================================== CRITICAL DATE 11/13 ======================================== PICTORIAL TYPE SHIPS 11/13 ======================================== AD/EDIT COMBOS COVER TYPE SHIPS 11/20 OFFSET FILM SHIPS 11/25 US BLUELINES FROM QUEBECOR DUE 12/5 OFFSET ON PRESS COVER ON PRESS 12/7 BINDERY STARTS 12/11 ======================================== ON-SALE DATE 1/7/03 ======================================== CANADIAN PAGINATION W/ CORRECTIONS N/A COVER W/O UPC & CARTOONS TO INTERNET N/A ON-SALE PERIOD 28 HOLIDAYS IN THANKSGIVING PRODUCTION CYCLE REDUCE DAYS ALLOWED TO PRODUCE THE ISSUE 10/1/01
EX-10.17 5 y58770ex10-17.txt PRINTING AGREEMENT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED INFORMATION ON QUOTE NUMBER W-24375A AND B, AND ATTACHMENT A. [TRANSCONTINENTAL LOGO] EXHIBIT 10.17 PRINTING CONTRACT BETWEEN: Transcontinental Printing (Interweb Printing Inc.) [The Printer] AND: General Media Communications, Inc. [The Customer] This contract shall become effective on January 1st, 2001 and sets forth the terms and conditions by which Interweb Printing Inc., having its head office at 1603 Montarville Boulevard, Boucherville, Quebec, J4B 5Y2 (hereinafter referred to as the [Printer]), shall supply the products and services specified hereinafter to General Media Communications Inc., having its head office at 11 Penn Plaza, 12th Floor, New York, NY 10001, USA (hereinafter referred to as the [Customer]). Additional terms and conditions of this contract are contained on pages 1, 2, 3, 4 and 5 and schedules [A] and [B] initialized by the parties hereto. THE PARTIES HERETO AGREE AS FOLLOWS 1.0 TERMS AND CONDITIONS OF CONTRACT 1.1 The term of this agreement shall be three (3) years, unless sooner terminated as provided below. This agreement shall be effective beginning January 1st, 2001 (effective date) and expires January 1st, 2004. 1.2 The price structure in Schedule [A] shall be effective on January 1st, 2001 and for a period of one (1) year thereafter, except for the changes described in section 3.4. 1.3 In the event either of the parties should become insolvent or bankrupt, the other party shall be entitled to terminate this Contract on no less than thirty (30) days' written notice to the other party or to its estate or successor. 1.4 Subject to the remainder of this agreement, upon termination, the Customer shall not be liable for any of the Printer's costs: (a) incurred or ordered after notice; (b) which can be cancelled at no loss to the Printer, or (c) in excess of the out-of-pocket loss to the Printer of any unused items sold to other customers or third parties or returned to suppliers. In any event, Printer's costs will only include normal manufacturing expenses. 2.0 STATUS OF WORK 2.1 The [Customer] retains the services of the Printer to print the following publications: The Canadian Edition of Penthouse Magazine, Forum, Variations and Forum and Variations Specials. The Printer hereby undertakes to perform all services necessary to print, bind, package and ship the publications on a monthly basis in accordance with the Customers's specifications as communicated in writing from time to time and as may be set forth in the schedules to this Contract. Notwithstanding any other actual or apparently conflicting language in this Contract, the Printer will maintain at minimum the high graphic standards of the United States editions, copies of which are annexed to this Contract as examples. Page 1 of 6 [TRANSCONTINENTAL LOGO] 2.2 This contract shall apply exclusively to the printed products mentioned in Section 2.1 hereof. Any other products published by the Customer, which are not included herein, shall be negotiated between the Printer and the Customer. 2.3 Printing shall be scheduled to take place during the Printer's normal business hours, namely from 7:00 p.m. on Sunday to 7:00 p.m. on Saturday. 2.4 The Customer will supply the paper to print the publications in accordance with the paper usage chart, which is attached as Schedule A. The Printer shall furnish to the Customer no later than the 15th of each month a written accounting of all paper received from the Customer and consumed during the previous month and all of the remaining stocks. The Printer shall take a physical inventory every six months during the term of this Contract and shall promptly supply the results in writing to the Customer, which may audit such inventory report at any time upon four (4) business days' notice to the Printer. Should the paper consumption exceed that set forth in Schedule B the Printer shall upon completion of such accounting, at Printer's option, reimburse the Customer for such excess either in kind or at the same price per pound, at a rate equal to the average cost of said paper during the accounting period. In the event of a net under consumption, the Customer agrees to pay the Printer an amount equal to one-half of the cost of the paper so under consumed, computed at the same rates. The value of under consumption, if any, of one kind or weight of the paper shall be used as a credit against over consumption, if any, of other kinds/weights of paper. Printer shall store up to three months' paper requirements for the printing of the four (4) publications on its premises, at no cost to the Customer. 2.5 The printer agrees to produce and maintain high quality standards of reproduction consistent with industry SWOP standards. The Printer shall bear the cost (including paper and ink) of make-goods caused by any error or omission attributable to the Printer. Repeated errors, or repeated failure to correct errors, will entitle the Customer to cancel this Contract on thirty (30) days' notice. 3.0 PRICE AND PAYMENT 3.1 The Customer undertakes to comply with the terms and conditions of sale described in the attachments. 3.2 The prices mentioned in Attachment A, W-24375 A and B include plates making, printing, binding, and mail preparation work and all other services necessary to print, bind, package and ship the four (4) publications. 3.3 The Customer shall be invoiced based on the number of copies ordered and delivered as described in Section 4.1. 3.4 Should there be an increase or reduction in the price of paper, the Printer may increase or reduce the prices as follows: 3.4.1 The increase in the Customer's costs shall be no greater than the actual increase in the cost incurred by the Printer. 3.4.2 The Customer shall be notified fifteen (15) days in advance. Page 2 of 6 [TRANSCONTINENTAL LOGO] 3.4.3 The Printer shall provide all supporting documentation with the notification provided for in section 3.4.2 above. 3.4.4 Labor and administrative costs shall be increased or decreased every twelve (12) months, commencing January 1st, 2002 based on the variation of the Consumer Price Index as reported in the Toronto Star for Eastern Canada over a base level which shall be that Consumer Price Index as of January 1st, 2001, and thereafter each increase or decrease shall have as its base the January 1st, level of the preceding year. 4.0 TERMS AND CONDITIONS 4.1 The Customer shall issue a purchase order for each issue including the print run, the nature of the work, the final quantities and provide shipping documentation. The Customer shall issue this purchase order to the Printer no later than fifteen (15) days prior to the scheduled press run start as agreed on by the parties. 4.2 The Printer shall submit one invoice for each issue. The invoice shall specify in detail satisfactory to the Customer the services performed and the prices charged. The terms are net thirty (30) days. The date of the invoice will be the last day of the shipping cycle. 4.3 Production schedules shall be prepared and approved by both parties. 4.4 The Printer will store finished copies of the four (4) publications for thirty (30) days following completion of shipping at no additional cost to the Customer; thereafter, such copies shall be shipped at the Customer's direction and expense to a facility designated by the Customer. Failing the Customer's instructions the Printer may destroy such copies but will give the Customer fifteen (15) days' notice before doing so. 4.5 In furtherance and not in derogation of the Printer's obligation of due care toward the Customer's property, the Printer shall cover by insurance the values added by the Printer in the form of raw materials, labour, and overhead, against fire, extended coverage perils, vandalism, malicious mischief and sprinkler leakage. The Customer will similarly insure its property while on the Printer's premises. The Customer will also insure its paper throughout the printing process (except waste paper). All waste paper shall become the Printer's property. 4.6 Risk of loss or damage to the finished work shall pass to the Customer upon delivery to a common carrier F.O.B. the Printer's shipping dock. 4.7 Neither the four (4) publications nor any material furnished by the Customer shall be subject to any lien(s) of the Printer or the Printer's creditors of any kind or nature whatsoever, and the Printer hereby waives any rights under statute or otherwise to assert any liens on or otherwise distrain the Customer's property, work in progress or the finished product. The Printer will take all steps prescribed by law to protect the Customer's interests as they may appear upon any levy or attempted levy by the Printer's creditors on the Customer's property or any finished work or work in progress; the Printer shall expeditiously seek to remove any such lien and in any event shall hold the Customer entirely harmless therefrom. Page 3 of 6 [TRANSCONTINENTAL LOGO] 4.8 The Printer shall use its best efforts to keep confidential the contents of each issue of the four (4) publications prior to general public distribution. 4.9 Customer may terminate this agreement as to any magazine effective on written notice if it discontinues publication of such magazine. 4.10 Customer shall be entitled to terminate this Agreement, notwithstanding the provisions of paragraph 1.1 above: 4.10.1 Upon written notice, if printer consistently falls below the standard of quality required by paragraph 2.1 above as provided in paragraph 2.5 above; 4.10.2 Upon the happening of an event of force majeure which prevents or substantially hinders Printer's full performance hereunder (force majeure being defined as an event the non-occurrence of which is relied upon by both parties for the performance of the contract and includes but is not limited to: strikes, war, fire, flood, Acts of God and any other unforeseen event of the same or a different nature not necessarily within the control of either party), Customer shall have the right to immediately remove the work from Printer and have the magazine printed elsewhere. Should the event of force majeure continue for more than forty-five (45) days Customer shall have the right to cancel this Agreement as to any or all magazines. 4.10.3 As specified in paragraph 6.2 below. 4.11 Either party shall have the right to terminate this agreement for a material breach which remains uncured more than thirty (30) days after written notice and demand to cure is received specifying the breach; such termination shall be by written notice effective thirty (30) days after receipt; provided always that if in Customer's reasonable business judgement Printer's breach substantially impairs Customer's ability to distribute its magazines on time Customer shall have the right immediately to move the work elsewhere as to any or all magazines. In any event, upon termination for any cause whatsoever Printer will cooperate fully with Customer in the transition process to a new printer. 5.0 LIABILITY FOR CONTENT 5.1 The Customer will indemnify and hold the Printer harmless from and against any claims, demands, suits, actions, costs, loss or judgements, including reasonable attorney's fees, for libel, defamation of character, copyright or trademark infringement, invasion of right of privacy or publicity, or patent infringement by any person, firm or entity against the Printer arising out of any material delivered by the Customer or supplied on its behalf to the Printer and used by the Printer in producing the four (4) publications. 5.2 In like manner the Printer shall indemnify and hold the Customer harmless from and against any claims, demands, suits, actions, costs, loss or judgements, including reasonable attorney's fees, for libel, defamation of character, copyright or trademark infringement, invasion of right of privacy or publicity, or patent infringement, by any Page 4 of 6 [TRANSCONTINENTAL LOGO] person, firm or entity against the Customer arising out of any act or omission of the Printer in performing its services hereunder. 5.3 No indemnification promised in sections 5.1 or 5.2 above shall be effective unless the indemnified party shall have given prompt notice of any indemnifiable claim to the indemnifying party. Thereafter the indemnifying party shall at its sole cost and expense defend the claim by counsel of its choosing reasonably acceptable to the indemnified party or at its option instruct the indemnified party to defend but at the indemnifying party's expense. Nothing herein shall prevent any indemnified party from retaining its own counsel at its own expense to advise it or to elect to defend with its own counsel but in such event such defense shall be at the indemnified party's sole expense and risk of liability. No indemnitor shall conclude a settlement binding on an indemnitee party absent the consent of the indemnitee. Should an indemnitee elect to settle or compromise any claim solely as to itself without permission of the indemnitor, the indemnitor shall thereafter have no further obligations toward the indemnitee. 6.0 DISPUTED INVOICES 6.1 The Customer shall not be obligated to pay any portion of any invoice, which it disputes in good faith. The Customer shall have sixty (60) days from the receipt of such invoice to notify the Printer in writing of any items which it disputes and shall specify its grounds therefor. Thereafter the parties shall attempt during the next thirty (30) days to attempt to resolve the dispute among themselves in good faith, failing which the dispute shall be submitted to arbitration in the City of New York by the American Arbitration Association according to its rules then in effect. Judgement of the arbitrators may be entered against the losing party in any court of competent jurisdiction and enforced as provided by law. In no event shall dispute of an invoice by the Customer be deemed a breach of this Contract or entitle the Printer to stop work. 6.2 Notwithstanding anything in this Contract to the contrary, the Printer's continued failure, for any reason expressly including events of force majeure and / or matters not within the control or due to the fault of the Printer, to produce the four (4) publication or to produce them timely in accordance with the production schedule submitted by the Customer shall entitle the Customer, on thirty (30) days' notice, to terminate this Contract and take the work elsewhere. 7.0 MISCELLANEOUS 7.1 Any amendments to this Contract shall only be valid if in writing signed by Printer and Customer. This Contract shall not be assigned by either party without the written consent of both parties, except that the Customer may assign it to a wholly owned subsidiary of the Customer or to an affiliate of the Customer which is under common ownership and control with the Customer. Page 5 of 6 [Transcontinental Logo] 7.2 This contract and the rights of the parties to it shall be governed by the law of the State of New York, USA, applicable to contracts made and wholly to be performed therein without regard to the conflicts of laws and rules thereof. No lawsuit arising out of the execution, formation, terms, performance or breach of this Contract shall be brought except in courts physically located in New York County, New York, and the parties hereto expressly consent to the personal jurisdiction of such courts over all such litigation and all matters whatsoever relating to or arising out of this Contract. This Contract and the attached schedules contain the sole understanding and agreement of the parties concerning the subject matter hereof, all prior negotiations, conversations, understandings and agreements, whether oral or written, being merged herein. 7.3 Notice where required shall be given to each party at its address first set forth above, or to its telefacsimile number, and shall be effective on receipt if by telefacsimile or by express service which requires a signed receipt, and otherwise three days from the date of mailing. Regular mail shall be sent first-class, postage prepaid. IN WITNESS WHEREOF the parties have signed in __________________ this __________ day of _______________2001. GENERAL MEDIA COMMUNICATIONS INC. TRANSCONTINENTAL PRINTING (Interweb Printing inc.) /s/ John C. Prebich /s/ Laurent Walker - ------------------------------- ------------------------------- NAME JOHN C. PREBICH NAME TITLE PRESIDENT/COO TITLE Sales Support /s/ John D. Orlando - ------------------------------- NAME JOHN D. ORLANDO TITLE SENIOR VP/CFO Page 6 of 6 [LOGO TRANSCONTINENTAL PRINTING] Quote No: W-24375-A - Page 1 Date: July 21st, 2000 GENERAL MEDIA C/O Mr. Hal Halpner Tel.: (212) 702-6000 277 Park Avenue Fax.: (212) 702-6262 New York, N.Y. 10172-0003 ================================================================================ We are pleased to be submitting this quote which, we believe, will permit us to serve you. We are offering you the manufacturing charges of 1 issue for a long term contract. ================================================================================ **VARIATIONS** QUANTITY: 250,000 copies (1 lot) OVERS: 2% SIZE: 5 1/4" x 8 1/8" PAGES: Cover: 4 pages Inside: 144 pages PAPER: Cover: 8 pts C2S (supplied) Inside: 128 pages on 40 # coated (supplied) 16 pages on 40 # uncoated (supplied) INK: Cover: 4 color process + 1 P.M.S. Inside: 4 color process, except the 16 pages Printed on uncoated, black + 1 P.M.S. (P.51 to 54 + 59 to 62 67 to 70 + 75 to 78) BINDERY: Perfect bound PACKAGING: Delivered on skids DELIVERY: F.O.B.: our plant (Courier services: extra) MATERIAL SUPPLIED: Final films single page with central cross marks on 4 sides of the page along with one set of blueprints duly signed and appropriate colorproofs. Confirmation of data & quantity to be printed must be indicated on blueprints. PRICE IN USD:
PREPRESS Process a postscript file, ripping and imposition of pages for CTP plates at /page Bluelines 888 pages at /page COVER Basic Makeready - Cover Running at /M (ink included) TEXT Makeready - 144 pages Running - /M (ink included) Plate changes - 12 at /ea.
Contract revised: January 9, 2001 ISO 9002 FO0305 INTERWEB PRINTING INC. Revised: 03-30-94 1603 Montarville Blvd. TELEPHONE: (450)655-2801 Boucherville, Quebec J4B 5Y2 Fax: (450)641-3650 [LOGO TRANSCONTINENTAL PRINTING] Quote No: W-24375-A - page 2 Date: July 21st, 2000 GENERAL MEDIA C/O Mr. Hal Halpner Tel.: (212) 702-6000 277 Park Avenue Fax.: (212) 702-6262 New York, N.Y. 10172-0003 ================================================================================
BINDERY Makeready Running at /M Version change 1 at /each Cut and Score covers PACKAGING AND MAILING Polybagging - opaque bags: 150,000 copies at /M (plastic supplied printing) Wafer tabs: 630 copies at /M Shrink wrap in bundles of 25's 50,000 copies at /ea. Affix Cheshire label - Makeready Affix Cheshire label - Running: 13,000 copies at /M Skids 20 skids at /ea. TOTAL IN USD
If you accept this proposal and conditions of sale on the following page, please return one copy duly signed of these documents confirming this order. /s/ Laurent Walter /s/ Hal Halpner - ----------------------------- ----------------------------- LAURENT WALTER HAL HALPNER 4/26/01 - ----------------------------- ----------------------------- Accepted by Date Contract revised: January 9, 2001 ISO 9002 FO0305 Revised: 03-30-94 [TRANSCONTINENTAL PRINTING LETTERHEAD] QUOTE NO: W-24375-B - page 1 DATE: July 21st, 2000 GENERAL MEDIA c/o Mr. Hal Halpner Tel.: (212) 702-6000 277 Park Avenue Fax: (212) 702-6262 New York, N.Y. 10172-0003 =========================================================================== We are pleased to be submitting this quote which, we believe, will permit us to serve you. We are offering you the manufacturing charges of 1 issue for a long term contract. ================================================================================ **FORUM** - --------- QUANTITY: 208,000 copies (1 lot) OVERS: 2% SIZE: 5 1/4" x 8 1/8" PAGES: Cover: 4 pages Inside: 96 pages ------ ------- PAPER: Cover: 8 pts C2S (supplied) Inside: Offset 70# (supplied) ------ ------- INK: Cover: 4 color process + Inside: P. 1 to 64 in black + ------ ------- 1 P.M.S. 1 P.M.S. P. 65 to 96 in 4 color process BINDERY: Perfect bind PACKAGING: Delivered on skids DELIVERY: F.O.B.: our plant (Courier services: extra) MATERIAL SUPPLIED: Final films single page with central cross marks on 4 sides of the page along with one set of blueprints duly signed and appropriate colorproofs. Confirmation of date & quantity to be printed must be indicated on blueprints. PRICE IN USD: ------- ---------------------------------------------- PREPRESS ---------------------------------------------- Process a postscript file, ripping and imposition of pages for CTP plates at /page Bluelines 600 pages at /page ---------------------------------------------- COVER ---------------------------------------------- Basic Makeready - Cover Running at /M (ink included) ---------------------------------------------- TEXT ---------------------------------------------- Makeready - 96 pages Running /M (ink included) Plate Changes - 12 at /ea. ---------------------------------------------- Contract revised: November 23rd 2000 INTERWEB PRINTING INC. ISO 9002 1603 Montarville Blvd. Telephone: (450) 655-2801 FO0305 Boucherville, Quebec J4B 5Y2 Fax: (450) 641-3650 Revised:03-30-94 [LOGO TRANSCONTINENTAL PRINTING] QUOTE NO: W-24375-B - Page 2 DATE: July 21st, 2000 GENERAL MEDIA c/o Mr. Hal Halpner Tel.: (212) 702-6000 277 Park Avenue Fax : (212) 702-6262 New York, N.Y. 10172-0003 ================================================================================
BINDERY Makeready Running at/M Version change 1 at/each Cut and score covers PACKAGING AND MAILING Polybagging - opaque bags: 75,000 copies at/M Polybagging - clear bags 85,000 copies at/M Wafer tabs: 500 copies at/M Shrink wrap in bundles of 25's 2,000 bundles at/ea. Affix Cheshire label - Makeready Affix Cheshire label - Running: 14,000 copies at/M Skids 15 skids at/ea. Shrink bands: 50,000 copies at/M TOTAL IN USD
If you accept this proposal and conditions of sale on the following page, please return one copy duly signed of these documents confirming this order. /s/ Laurent Walter /s/ Hal Halpner - ----------------------------- ----------------------------- LAURENT WALTER HAL HALPNER 4/26/01 - ----------------------------- ----------------------------- Accepted by Date Contract revised: November 23rd 2000 ISO 9002 FO0305 Revised: 03-30-94 [LOGO TRANSCONTINENTAL PRINTING] ATTACHMENT "A" - Page 1 November 4th, 1997 GENERAL MEDIA c/o Mr. Hal Halpner Tel.: (212) 702-6000 277 Park Avenue Fax: (212) 702-6262 New York, N.Y. 10172-0003 ================================================================================ We are pleased to be submitting this quote which, we believe, will permit us to serve you. ================================================================================ **PENTHOUSE - CANADIAN VERSION** QUANTITY: 150,000 copies + add'l 1000 OVERUN: 1.5 % SIZE: 8" x 10 3/4" PAGES: Cover: 4 pages or 6 pages Inside: a) 136 pages + 6 pages [gatefold] b) 140 pages + 6 pages [gatefold] c) 144 pages + 6 pages [gatefold] d) 148 pages + 6 pages [gatefold] e) 152 pages + 6 pages [gatefold] f) 156 pages + 6 pages [gatefold] g) 164 pages + 6 pages [gatefold] h) 172 pages + 6 pages [gatefold] i) 184 pages + 6 pages [gatefold] j) 188 pages + 6 pages [gatefold] k) 196 pages + 6 pages [gatefold] l) 200 pages + 6 pages [gatefold] m) 220 pages + 6 pages [gatefold] n) 332 pages + 6 pages [gatefold] PAPER: Cover: 4 pages Coated no 3 100# 6 pages Coated no 3 80# Inside: Coated # 5 40# Poster: Coated # 3 60# INK: Cover: 6 colors (recto) / 4 colors (verso) + U.V. coating Inside: 4 color process BINDERY: Perfect bound PACKAGING: In shrink wrapped bundles, on skids DELIVERY: F.O.B.: our plant MATERIAL SUPPLIED: Final negative films single page with standard central cross marks on 4 sides of the page along with one set of blueprints duly signed and colorproofs made from films supplied. Confirmation of date & quantity to be printed must be indicated on blueprints. *Contract revised: January 9th, 2001 ISO 9002 FO0305 INTERWEB PRINTING INC. Revised: 03 1603 Montarville Blvd. Telephone: (450)655-2801 Boucherville, Quebec J4B 5Y2 Fax: (450)641-3650 [TRANSCONTINENTAL LOGO] GENERAL MEDIA ATTACHMENT "A" - PAGE 2 c/o Mr. Hal Halpner November 4th, 1997 ================================================================================ TAXES: Additional, if applicable
============================================================================================== *Prices are in USD ================== Cover: 4 pages or 6 pages Inside: 136 / 140 / 144 / 148 / 152 / 156 / 164 / 172 / 184 / 188 / 196 / 200 / 220 / 332 pages ==================================================================================================================================== DESCRIPTION 150,000 ADD'L 1000 ==================================================================================================================================== Cover 6/4: - ---------- Films imposition, plates and make- ready including process inks 4 colors + 2 PMS spots 4 pages 6 pages U.V. coating - 4 pages U.V. coating - 6 pages Gatefold: - --------- Films imposition, plates and make- ready including process inks 4 colors Bindery - Perfect bound - ----------------------- Make-ready Run Blow-in/Bind-in (each) Polybagging (46,000) Clear bags (45,000) Paper requirements (supplied): - ------------------------------ Cover 4 pages on 100# 8,570# 48.19# 6 pages on 80# 9,738# 57.28# Gatefold 7,303# 42.96#
*Contract revised: January 9th, 2001 [TRANSCONTINENTAL LOGO] GENERAL MEDIA ATTACHMENT "A" - Page 3 c/o Mr. Hal Halpner November 4th, 1997 ================================================================================ * INSIDE: -------
PAGES PRICE TOTAL and ADD'L 1000 PAGES PRICE TOTAL and ADD'L 1000 a) 136 pages /M add'l i) 184 pages /M add'l b) 140 pages /M add'l j) 188 pages /M add'l c) 144 pages /M add'l k) 196 pages /M add'l d) 148 pages /M add'l l) 200 pages /M add'l e) 152 pages /M add'l m) 220 pages /M add'l f) 156 pages /M add'l n) 332 pages /M add'l g) 164 pages /M add'l h) 172 pages /M add'l
* BUNDLES: -------- Bundles of 15's: /M Bundles of 20's: /M Bundles of 25's: /M * SKIDS: /each ------ * FREIGHT: --------
PAGES PRICE PAGES PRICES a) 136 pages /copy i) 184 pages /copy b) 140 pages /copy j) 188 pages /copy c) 144 pages /copy k) 196 pages /copy d) 148 pages /copy l) 200 pages /copy e) 152 pages /copy m) 220 pages /copy f) 156 pages /copy n) 332 pages /copy g) 164 pages /copy h) 172 pages /copy
* PAPER REQUIREMENTS: -------------------
PAGES INSIDE + COVER PAGES INSIDE + COVER a) 136 pages 96,489# + 617.99# i) 184 pages 129,965# + 836.11# b) 140 pages 99,974# + 636.17# j) 188 pages 133,450# + 854.29# c) 144 pages 101,941# + 654.34# k) 196 pages 138,902# + 890.64# d) 148 pages 105,426# + 672.52# l) 200 pages 142,386# + 908.81# e) 152 pages 108,153# + 690.70# m) 220 pages 156,018# + 999.69# f) 156 pages 110,879# + 708.87# n) 332 pages 234,633# + 1,508.63# g) 164 pages 116,333# + 745.22# h) 172 pages 121,785# + 781.58#
*Contract revised: January 9th, 2001 [TRANSCONTINENTAL LOGO] GENERAL MEDIA ATTACHMENT "A" - PAGE 4 c/o Mr. Hal Halpner November 4th, 1997 - -------------------------------------------------------------------------------- - - CTP CHARGES: ------------ To process a Postscript file, downloading, ripping and imposition of pages to CTP plates: page ADDITIONAL CHARGES: - ------------------- - - Plate change: /each - - Blueprints (2): /each - - Manual stripping: /film/page - - Strip [Printed in Canada]:
============================================================================================================================== PAPER USAGE CHART ============================================================================================================================== 4 PAGES 6 PAGES 8 PAGES 12 PAGES 16 PAGES 24 PAGES 32 PAGES (GATEFOLD) LBS MR # RUN MR # RUN MR # RUN MR # RUN MR # RUN MR # RUN MR # RUN 1000# 1000# 1000# 1000# 1000# 1000# 1000# 40 # N/A N/A N/A N/A 758# 36.35# 758# 54.53# 758# 72.70# 758# 109.06# 758# 145.41# 60 # N/A N/A 859# 42.96# N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 80 # N/A N/A 1,146# 57.28# N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 100 # 1,341# 48.19# N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
/s/ Hal Halpner /s/ Laurent Walter - ---------------------- --------------------------- HAL HALPNER LAURENT WALTER *Contract revised: January 9th, 2001 ISO 9002 FO4385 Revised: 03 EX-12.1 6 y58770ex12-1.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 General Media, Inc. Computation of Ratio of Earning to Fixed Charges Year Ended December 31,
1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ ----------- Income (loss) from continuing operations, before income taxes $ (1,915,000) $ (3,879,000) $ 22,606,000 $ 5,467,000 $(9,966,000) ------------ ------------ ------------ ------------ ----------- Adjustments to income (loss) Interest expense 9,918,000 9,918,000 7,969,000 6,865,000 8,003,000 Interest income (611,000) (517,000) (762,000) (495,000) (289,000) Interest expense in rental charges 754,000 757,000 615,000 594,000 594,000 ------------ ------------ ------------ ------------ ----------- Adjusted income (loss) $ 8,146,000 $ 6,279,000 $ 30,428,000 $ 12,431,000 $(1,658,000) ============ ============ ============ ============ =========== Fixed charges Interest expense $ 9,918,000 $ 9,918,000 $ 7,969,000 $ 6,865,000 $ 8,003,000 Interest expense in rental charges 754,000 757,000 615,000 594,000 594,000 ------------ ------------ ------------ ------------ ----------- Total fixed charges $ 10,672,000 $ 10,675,000 $ 8,584,000 $ 7,459,000 $ 8,597,000 ============ ============ ============ ============ =========== Ratio of earnings to fixed charges Note (a) Note (a) 3.54 1.67 Note (a)
Note (a) - For the years ended December 31, 1997, 1998 and 2001 earnings were insufficient to cover fixed charges by $2,526,000, $4,396,000 and $10,255,000, respectively. EX-21.1 7 y58770ex21-1.txt SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES OF GENERAL MEDIA, INC.
State or Other Jurisdiction of Incorporation Name Or Organization ---- --------------- 1. General Media Communications, Inc. Delaware 2. General Media Films, Inc. (*) New York 3. General Media International Financial Services (GMIFS) N.V. Netherlands Antilles 4. General Media (UK), Ltd. United Kingdom 5. Penthouse Clubs International Establishment Liechtenstein 6. Penthouse Images Acquisition, Ltd. New York 7. Penthouse Music, Ltd. (*) Delaware 8. Pure Entertainment Telecommunications, Inc. New York 9. Pure Entertainment Telecommunications (Curacao) N.V. Netherlands Antilles 10. General Media Entertainment, Inc. New York 11. Penthouse Financial Services N.V. Netherlands Antilles 12. General Media Art Holding, Inc. Delaware 13. GMCI Internet Operations, Inc. New York 14. GMI On-Line Ventures, Ltd. Delaware
(*) Merged Into General Media Communications, Inc. On May 11, 2001. -----END PRIVACY-ENHANCED MESSAGE-----