Penthouse International Inc.’s shares have plummeted since the announcement that the SEC was investigating Bob Guccione’s print media empire earlier this month. On June 11 stock hit $2.80 a share, but began its descent the next day – one day before the SEC investigation was announced. Today the stock has dropped to $1.70, still higher than the company's lowest share price over the last year of $1.38.
Penthouse has said the SEC had advised it that the inquiry should not be construed as an indication that any violation of law has occurred.
Penthouse revealed on June 13 that the SEC was investigating inaccuracies in its financial statements for the first quarter of 2003 and for all of 2002. The company said it would correct the errors, which it described as inadvertent. Penthouse International Inc, and General Media, a holding company owned by Penthouse International Inc. that runs the Penthouse magazine, turned in different figures for their quarterly report.
Bob Guccione, who is CEO of both Penthouse International Inc. and General Media, had signed off on both SEC filings. The first one, filed by General Media on May 16, claimed an undetermined loss for the quarter. The second report, filed a week later for Penthouse, said Penthouse had an $828,000 profit for that quarter.
According to Stephen Gross, appointed in March as president of General Media Inc., the numbers should have been the same. Gross, a certified public accountant is also a certified fraud examiner, a certified valuation analyst and former chairman of the ethics committee of the Georgia Society of CPAs.
Gross blames the error on the lack of accounting oversight on the report – Penthouse’s auditor had quit in a dispute earlier in the year, and the SEC filings were turned in without a new team in place.
Penthouse has been plagued with financial woes lately. Revenue for the adult magazine publisher has dropped 53 percent in the last decade to $53.8 million, due in large part to a drop in circulation for the company’s flagship Penthouse publication.
Even more disturbing for the company is the fact that liabilities are exceeding the company’s assets by $64 million. This has resulted in a default on $41.8 million dollars of bonds in April, and Penthouse, behind on their lease and mortgage payments could be evicted from their Manhattan corporate headquarters and foreclosure of the Penthouse Mansion.
Penthouse International shares began trading in December, after owner Robert Guccione merged his private holding company with a dormant publicly traded company called American Pulp Exchange Inc., and then changed its name to Penthouse International. Penthouse now owns General Media. Guccione is chief executive of both companies and owns 85 percent of each.
Guccione certified and filed contradictory first quarter reports with the SEC. The first one, filed by General Media on May 16, said it had an as-yet undetermined loss for the quarter. The second report, filed a week later for Penthouse, said Penthouse had an $828,000 profit for that quarter.
The probable cause for their financial woes is Penthouse’s lack of diversity in a time when print media is taking a beating. Last year, 83 percent of its revenue still came from magazines including Forum, Variations, Penthouse Letters and Girls of Penthouse, 14 percent came from the Internet and 3 percent was from videos.
Penthouse has been busy this year trying to change that – they recently negotiated a licensing deal for the first Penthouse brand adult retail store, have expanded their revenue sources from the Internet by offering, among other things, a new adult DVD rental service. They have also opened the first Penthouse brand nightclub.
In their SEC filings Penthouse suggested at least one positive aspect of their business – there more demand for ads from makers of adult novelties than ever before.
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