-----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, IP7wHHLDlKdr1fppTkAiYFw/57d27Wmna3n+zS3U/RrMWubBHeK3sHzhi2IhdXwE jhp6JN0gGCfzSPqMGNjG5w== /in/edgar/work/0000950123-00-010634/0000950123-00-010634.txt : 20001116 0000950123-00-010634.hdr.sgml : 20001116 ACCESSION NUMBER: 0000950123-00-010634 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: [2721 ] IRS NUMBER: 522187059 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15395 FILM NUMBER: 768920 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 MAIL ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 10-Q 1 y42722e10-q.txt MARTHA STEWART LIVING OMNIMEDIA, INC. 1 SECURITIES AND EXCHANGE COMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2000 COMMISSION FILE NUMBER 001-15395 Martha Stewart Living Omnimedia, Inc. (Exact name of Registrant as specified in its charter) Delaware 52-2187059 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 11 West 42nd Street 10036 New York, NY (Zip Code) (Address of principal executive offices) Registrant's Telephone Number, Including Area Code: (212) 827-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding at Class November 10, 2000 Class A, $0.01 par value 14,356,848 Class B, $0.01 par value 34,126,831 ----------------- Total 48,483,679 =================
2 Martha Stewart Living Omnimedia, Inc. Index to Form 10-Q
Page ---- Part I. Financial information Item 1. Financial Statements 2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Index to Exhibits 18
2 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Balance Sheets (in thousands, except per share amounts)
September 30, December 31, 2000 1999 ------------- ------------ (unaudited) ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 118,876 $ 154,749 Accounts receivable, net 41,596 41,683 Inventories 13,131 6,163 Deferred television production costs 3,782 2,543 Other current assets 5,113 4,757 ------------- ------------- Total current assets 182,498 209,895 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, net 27,772 18,709 ------------- ------------- INTANGIBLE ASSETS, net 47,945 50,157 ------------- ------------- OTHER ASSETS 17,253 3,010 ------------- ------------- Total assets $ 275,468 $ 281,771 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 49,878 $ 40,934 Current portion of deferred subscription income 29,851 26,938 ------------- ------------- Total current liabilities 79,729 67,872 ------------- ------------- DEFERRED SUBSCRIPTION INCOME 6,553 8,047 ------------- ------------- OTHER NONCURRENT LIABILITIES 6,249 6,450 ------------- ------------- Total liabilities 92,531 82,369 ------------- ------------- SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 14,352 and 15,484 shares outstanding in 2000 and 1999, respectively 144 155 Class B common stock, $.01 par value, 150,000 shares authorized; 34,127 outstanding in 2000 and 1999 341 341 Capital in excess of par value 161,274 193,081 Retained earnings 21,178 5,825 ------------- ------------- Total shareholders' equity 182,937 199,402 ------------- ------------- Total liabilities and shareholders' equity $ 275,468 $ 281,771 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Income Statements (unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2000 1999 2000 1999 ----------- ---------- ---------- ---------- Revenues Publishing $ 38,546 $ 31,654 $ 126,647 $ 104,968 Television 7,112 6,418 21,445 19,205 Merchandising 6,757 4,789 18,915 16,298 Internet/Direct Commerce 9,474 6,977 33,221 20,869 ----------- ---------- ---------- ---------- Total revenues 61,889 49,838 200,228 161,340 ----------- ---------- ---------- ---------- Operating costs and expenses Production, distribution and editorial 34,396 28,084 107,040 82,794 Selling and promotion 9,689 7,547 32,226 27,541 General and administrative 10,279 8,533 31,111 27,134 Depreciation and amortization 2,325 1,761 6,761 4,493 ----------- ---------- ---------- ---------- Total operating costs and expenses 56,689 45,925 177,138 141,962 ----------- ---------- ---------- ---------- Income from operations 5,200 3,913 23,090 19,378 Interest income (expense), net 1,388 (201) 4,086 (798) ----------- ---------- ---------- ---------- Income before income taxes 6,588 3,712 27,176 18,580 Income tax provision 2,768 238 11,823 940 ----------- ---------- ---------- ---------- Net income $ 3,820 $ 3,474 $ 15,353 $ 17,640 =========== ========== ========== ========== Earnings per share Basic $ 0.08 $ 0.31 =========== ========== Diluted $ 0.08 (See Note) $ 0.31 (See Note) =========== ==========
Note Reference is made to Note 3 to the Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for information about earnings per share data. On a basis comparable to the three and nine months ended September 30, 2000, basic and diluted earnings per share for the three and nine month periods ended September 30, 1999 would have been $ 0.04 and $ 0.19, respectively. The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 Martha Stewart Living Omnimedia, Inc. Consolidated Statement of Shareholders' Equity For the Nine Months Ended September 30, 2000 (unaudited, in thousands)
Class A Class B common stock common stock ----------------------- ----------------------- Capital in excess of Retained Shares Amount Shares Amount par value earnings Total ---------- ---------- ---------- ---------- ----------- ------------ --------- Balance at January 1, 2000 15,484 $ 155 34,127 $ 341 $ 193,081 $ 5,825 $ 199,402 Net income for the period - - - - - 15,353 15,353 Repurchase of shares (1,366) (14) - - (32,492) - (32,506) Issuance of shares for stock option exercises 234 3 - - 685 688 ---------- ---------- ---------- ---------- ----------- ------------ --------- Balance at September 30, 2000 14,352 $ 144 34,127 $ 341 $ 161,274 $ 21,178 $ 182,937 ========== ========== ========== ========== =========== ============ =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Statements of Cash Flows (unaudited, in thousands)
Nine Months Ended September 30, ----------------------------- 2000 1999 ------------ ------------ Cash flows from operating activities Net income $ 15,353 $ 17,640 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 6,761 4,493 Changes in operating assets and liabilities 706 (7,341) ------------ ------------ Net cash provided by operating activities 22,820 14,792 ------------ ------------ Cash flows from investing activities Equity investment (13,297) - Capital expenditures (13,578) (1,596) ------------ ------------ Net cash used in investing activities (26,875) (1,596) ------------ ------------ Cash flows from financing activities Repurchase of common stock (32,506) - Proceeds received from stock option exercises 688 - Issuance of equity - 25,000 Principal repayment of long term debt - (27,650) Distributions to members - (3,240) ------------ ------------ Net cash used in financing activities (31,818) (5,890) ------------ ------------ Net increase (decrease) in cash (35,873) 7,306 Cash and cash equivalents, beginning of period 154,749 24,578 ------------ ------------ Cash and cash equivalents, end of period $ 118,876 $ 31,884 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) Martha Stewart Living Omnimedia, Inc. (together with its subsidiary, the "Company") includes the operations, assets and liabilities of Martha Stewart Living Omnimedia LLC ("MSLO"), a predecessor to the Company and its former parent, which was merged with and into the Company on October 22, 1999. This merger was accounted for as a combination of companies under common control and accordingly, the financial statements for prior periods have been retroactively restated. 1. Accounting policies a. General The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to its fiscal year ended December 31, 1999. b. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company's consolidated financial statements. c. Intangible assets Intangible assets, representing the excess of purchase price over net assets acquired, include the value assigned to subscriber lists, trade names and goodwill, and are being amortized over twenty years. Management reassesses quarterly the appropriateness of both the carrying value and remaining life of intangible assets, principally based on forecasts of future undiscounted cash flows. d. Income taxes The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Prior to the Company's conversion to a C corporation as a result of its merger with MSLO on October 22, 1999, no provision had been made in the accompanying condensed consolidated financial statements for federal income taxes since, pursuant to provisions of the Internal Revenue Code, the results of operations of MSLO during the relevant time periods were reportable by the members of MSLO on their individual tax returns. However, MSLO was subject to certain foreign, state and city income taxes. 7 8 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) 2. Inventories The components of inventories are as follows:
September 30, December 31, 2000 1999 ------------- ------------ Paper $ 7,415 $ 3,465 Catalog merchandise 5,716 2,698 ------------- ------------ $ 13,131 $ 6,163 ============= ============
3. Earnings per share Earnings per share are computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding during each period. Diluted earnings per share include the determinants of basic earnings per share and, in addition, give effect to dilutive potential common shares. The computations of basic and diluted earnings per share for the three months and nine months ended September 30, 2000 are set forth below:
Three months Nine months ended ended September 30, September 30, 2000 2000 ------------- ------------- Numerator for basic and diluted earnings per share- net income available to common shareholders $ 3,820 $ 15,353 ------------- ------------- Denominator for basic earnings per share- weighted average number of common shares outstanding 48,365 48,752 Effect of dilutive securities- dilutive potential common shares 2,376 1,576 ------------- ------------- Denominator for diluted earnings per share- weighted average number of common shares and dilutive potential common shares 50,741 50,328 ------------- ------------- Basic earnings per share $ 0.08 $ 0.31 ------------- ------------- Diluted earnings per share $ 0.08 $ 0.31 ------------- -------------
8 9 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) The Company became a "C" corporation on October 22, 1999. Prior thereto, it operated as a limited liability company. Historical earnings per share have not been presented for the three and nine month periods ended September 30, 1999, since prior to becoming a "C" corporation the Company had LLC interests outstanding and no common shares outstanding. Furthermore, historical earnings do not reflect income taxes that would have been charged had the Company been a "C" corporation. The pro forma adjustment to income tax provision below reflects the income taxes that would have been recorded had the Company been a "C" corporation at January 1, 1999. Pro forma weighted average common shares outstanding reflects the average shares that would have been outstanding had the conversion to a "C" corporation been done as of January 1, 1999. Adjusted pro forma basic and diluted earnings per share for the three months and nine months ended September 30, 1999 are calculated based upon the number of common shares outstanding as if all common shares issued in connection with the Company's initial public offering and the July 27, 1999 investment by Kleiner Perkins Caufield & Byers in the Company were outstanding as of January 1, 1999 in order to better reflect comparability between periods. Proceeds received from these transactions have not been included in the calculation of earnings per share. There was no dilution from common stock equivalents outstanding during such periods. The computations of pro forma and adjusted pro forma basic and diluted earnings per share for the three months and nine months ended September 30, 1999 are set forth below:
Three months Nine months ended ended September 30, September 30, 1999 1999 ------------- ------------- Net income $ 3,474 $ 17,640 Pro forma adjustment to income tax provision (1,597) (8,350) ------------- ------------- Pro forma net income $ 1,877 $ 9,290 ============= ============= Pro forma earnings per share- basic and diluted $ 0.05 $ 0.23 ------------- ------------- Pro forma weighted average common shares outstanding 40,619 39,657 ------------- ------------- Adjusted pro forma earnings per share- basic and diluted $ 0.04 $ 0.19 ------------- ------------- Adjusted pro forma weighted average common shares outstanding 49,583 49,583 ------------- -------------
4. Industry segments The Company is a leading creator of original "how to" content and related products for homemakers and other consumers. The Company's business segments are Publishing, Television, Merchandising and Internet/Direct Commerce. The Publishing segment primarily consists of the Company's magazine operations, and also those related to its book, radio, newspaper and music operations. The Television segment consists of the Company's television production operations that produce television programming that airs in syndication in the United States and on cable in the United States, Canada and certain other international markets, weekly segments on CBS's The Early Show broadcast, as well as periodic prime time specials. The Merchandising segment consists of the Company's operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Internet/Direct Commerce segment comprises the Company's operations relating to the Martha by Mail catalog and the website marthastewart.com. 9 10 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) Revenues for each segment are presented in the condensed consolidated income statements. Income from operations for each segment were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Publishing $ 13,132 $ 10,432 $ 46,902 $ 34,525 Television 663 198 3,311 1,956 Merchandising 6,701 4,686 18,753 16,117 Internet/Direct Commerce (5,680) (3,626) (17,091) (7,708) ------------ ------------ ------------ ------------ Total before corporate charges 14,816 11,690 51,875 44,890 Corporate (9,616) (7,777) (28,785) (25,512) ------------ ------------ ------------ ------------ Income from operations $ 5,200 $ 3,913 $ 23,090 $ 19,378 ============ ============ ============ ============
5. Equity Transactions In March 2000, the Company repurchased 1.366 million shares of Class A common stock from Time Publishing Ventures, Inc. at a purchase price of $23.79 per share for a total consideration of $32.5 million. Concurrently, Time's put and call rights relating to its remaining equity terminated. The shares were retired upon repurchase. 6. Other Assets Included in other assets at September 30, 2000 is a minority equity investment of $13.3 million in BlueLight.com, an e-commerce company. The investment is carried at cost. 7. Supplemental Cash Flow Information
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Cash paid for interest $ 145 $ 434 $ 508 $ 2,463 Cash paid for income taxes 1,891 198 8,961 683
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart Living Omnimedia, Inc., and, unless the context requires otherwise, Martha Stewart Living Omnimedia LLC ("MSLO"), the legal entity that prior to October 22, 1999 operated the business we now operate. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THREE MONTHS ENDED SEPTEMBER 30, 1999
Three Months Ended September 30, ----------------------------- 2000 1999 ------------ ------------ (in thousands, except per share amounts) Revenues Publishing $ 38,546 $ 31,654 Television 7,112 6,418 Merchandising 6,757 4,789 Internet/Direct Commerce 9,474 6,977 ------------ ------------ Total revenues 61,889 49,838 ------------ ------------ Operating costs and expenses Production, distribution and editorial 34,396 28,084 Selling and promotion 9,689 7,547 General and administrative 10,279 8,533 Depreciation and amortization 2,325 1,761 ------------ ------------ Total operating costs and expenses 56,689 45,925 ------------ ------------ Income from operations 5,200 3,913 ------------ ------------ Interest income (expense), net 1,388 (201) ------------ ------------ Income before income taxes 6,588 3,712 ------------ ------------ Income tax provision 2,768 238 ------------ ------------ Net income 3,820 3,474 ------------ ------------ Pro forma adjustment to income tax provision - (1,597) ------------ ------------ Pro forma net income $ 3,820 $ 1,877 ============ ============ Earnings per share- diluted $ 0.08 ============ Adjusted pro forma earnings per share- diluted $ 0.04 ============
Revenues. Total revenues increased $12.1 million, or 24.2%, to $61.9 million for the three months ended September 30, 2000, from $49.8 million for the three months ended September 30, 1999. Publishing revenues increased $6.9 million, or 21.8%, to $38.5 million for the three months ended September 30, 2000, from $31.7 million for the three months ended September 30, 1999. This increase was primarily due to an increase in advertising pages sold in, and increased newsstand sales of, Martha Stewart Living magazine, and revenues earned from the initial publication of Martha Stewart Holiday- Halloween 2000 in September 2000. Television revenues increased $0.7 million, or 10.8%, to $7.1 million for the three months ended September 30, 2000, from $6.4 million for the three months ended September 30, 1999. The increase is due primarily to additional revenues associated with higher distribution of the second half hour of our Martha Stewart Living program and revenues earned from our cable program, from Martha's Kitchen, which began broadcasting in September 1999, partially offset by reduced advertising revenues on the Martha Stewart Living program, due to lower ratings during the three months ended September 30, 2000. Merchandising revenues increased $2.0 million, or 41.1%, to $6.8 million for the three months ended September 30, 2000, from $4.8 million for the three months ended September 30, 1999, primarily as a result of revenues earned on purchases of initial inventory quantities of our Martha Stewart Everyday Kitchen product line. Internet/Direct Commerce revenues increased $2.5 million, or 35.8%, to $9.5 million for the three months ended September 30, 2000, from $7.0 million for the three months ended September 11 12 30, 1999, due to increased merchandise sales resulting from higher catalog circulation, greater product offerings, increased Internet traffic and increased advertising revenues. Production, distribution and editorial. Production, distribution and editorial expenses increased $6.3 million, or 22.5%, to $34.4 million for the three months ended September 30, 2000, from $28.1 million for the three months ended September 30, 1999. Publishing segment costs increased $2.7 million reflecting increased costs for Martha Stewart Living magazine due primarily to an increase in the number of pages printed per issue and the publication of Martha Stewart Holiday- Halloween 2000 in the third quarter. Internet/Direct Commerce costs increased $3.3 million due to an increase in cost of goods sold and fulfillment costs, each as a result of higher revenues, as well as increased catalog production and distribution costs resulting from higher catalog circulation. In addition, costs increased due to increased investment in developing and maintaining our Internet site. Television costs increased $0.3 million, primarily as a result of higher distribution costs associated with revenues received from the second half-hour of our syndicated daily program during the three months ended September 30, 2000. Selling and promotion. Selling and promotion expenses increased $2.1 million, or 28.4% to $9.7 million for the three months ended September 30, 2000, from $7.5 million for the three months ended September 30, 1999. Publishing segment costs increased $1.5 million resulting from higher advertising and circulation costs incurred to support higher revenues, including revenues from the publication of Martha Stewart Holiday- Halloween 2000. Internet/Direct Commerce segment costs increased $0.6 million resulting from higher costs associated with higher revenues and increased promotion costs. General and administrative. General and administrative expenses increased $1.7 million, or 20.5%, to $10.3 million for the three months ended September 30, 2000, from $8.5 million for the three months ended September 30, 1999. The higher expenses have been incurred primarily as a result of higher occupancy costs needed to support growth in headcount, as well as increased compensation costs and costs associated with our becoming a public company in October 1999. Depreciation and amortization. Depreciation and amortization increased $0.6 million, or 32.0% to $2.3 million for the three months ended September 30, 2000, from $1.8 million for the three months ended September 30, 1999. The increase is attributable to higher levels of property and equipment. Interest income (expense), net. Interest income (expense), net was $1.4 million for the three months ended September 30, 2000, compared to interest expense of $0.2 million for the three months ended September 30, 1999. Interest income for the three months ended September 30, 2000 resulted from higher cash balances primarily related to the proceeds received from our initial public offering in October 1999. During the three months ended September 30, 1999, we had outstanding long term debt which resulted in interest expense in that period. Such long term debt was fully repaid in July 1999. Income tax provision. Income tax provision for the three months ended September 30, 2000 was $2.8 million, representing a 42% effective income tax rate. Income tax provision for the three months ended September 30, 1999 was $0.2 million. During the three months ended September 30, 1999, we operated as a limited liability company and were therefore not subject to Federal income tax on our earnings. In connection with our initial public offering in October 1999, we became a "C" corporation and accordingly our earnings became subject to income taxes from that date forward. The pro forma adjustment to income tax provision of $1.6 million reflects the additional taxes that would have been incurred had we been a "C" corporation during that time. The effective income tax rate during the three months ended September 30, 2000 was lower than the pro forma effective income tax rate for the three months ended September 30, 1999 due primarily to tax exempt interest earned during the 2000 quarter. Net income. Net income was $3.8 million for the three months ended September 30, 2000, compared to pro forma net income of $1.9 million for the three months ended September 30, 1999, as a result of the above mentioned factors. Earnings per share. Earnings per share- diluted was $0.08 per share for the three months ended September 30, 2000. Adjusted pro forma earnings per share for the three months ended September 30, 1999 of $ 0.04 has been computed on a pro forma basis assuming we had been a "C" corporation at January 1, 1999, and the shares issued in connection with our initial public offering and the July 27, 1999 investment by Kleiner Perkins Caufield & Byers in MSLO were outstanding as of January 1, 1999, in order to better reflect comparability between periods. 12 13 COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED SEPTEMBER 30, 1999
Nine Months Ended September 30, ----------------------------- 2000 1999 ------------ ------------ (in thousands, except per share amounts) Revenues Publishing $ 126,647 $ 104,968 Television 21,445 19,205 Merchandising 18,915 16,298 Internet/Direct Commerce 33,221 20,869 ------------ ------------ Total revenues 200,228 161,340 ------------ ------------ Operating costs and expenses Production, distribution and editorial 107,040 82,794 Selling and promotion 32,226 27,541 General and administrative 31,111 27,134 Depreciation and amortization 6,761 4,493 ------------ ------------ Total operating costs and expenses 177,138 141,962 ------------ ------------ Income from operations 23,090 19,378 ------------ ------------ Interest income (expense), net 4,086 (798) ------------ ------------ Income before income taxes 27,176 18,580 ------------ ------------ Income tax provision 11,823 940 ------------ ------------ Net income 15,353 17,640 ------------ ------------ Pro forma adjustment to income tax provision - (8,350) ------------ ------------ Pro forma net income $ 15,353 $ 9,290 ============ ============ Earnings per share- diluted $ 0.31 ============ Adjusted pro forma earnings per share- diluted $ 0.19 ============
Revenues. Total revenues increased $38.9 million, or 24.1%, to $200.2 million for the nine months ended September 30, 2000, from $161.3 million for the nine months ended September 30, 1999. Publishing revenues increased $21.7 million, or 20.7%, to $126.6 million for the nine months ended September 30, 2000, from $105.0 million for the nine months ended September 30, 1999. This increase was primarily due to an increase in advertising pages sold in, and higher newsstand sales of, Martha Stewart Living magazine, as well as the publication of Martha Stewart Baby in March 2000 and the initial publication of Martha Stewart Holiday- Halloween 2000 in September 2000. Television revenues increased $2.2 million, or 11.7%, to $21.4 million for the nine months ended September 30, 2000, from $19.2 million for the nine months ended September 30, 1999. The increase is due primarily to additional revenues associated with higher distribution of the second half hour of our Martha Stewart Living program and revenues earned from our cable program from Martha's Kitchen, which began broadcasting in September 1999, partially offset by reduced advertising revenues on the Martha Stewart Living program due to lower ratings during the nine months ended September 30, 2000. Merchandising revenues increased $2.6 million, or 16.1%, to $18.9 million for the nine months ended September 30, 2000, from $16.3 million for the nine months ended September 30, 1999, primarily as a result of revenues earned on purchases of initial inventory quantities of our Martha Stewart Everyday Kitchen product line, as well as increased revenues earned from our Martha Stewart Everyday Garden product line, which had its full product rollout in Spring 2000. Merchandising revenues increased 29.8% excluding $1.7 million in revenues earned during the nine months ended September 30, 1999 from an adjustment to revenues earned in prior years. Internet/Direct Commerce revenues increased $12.4 million, or 59.2%, to $33.2 million for the nine months ended September 30, 2000, from $20.9 million for the three months ended September 30, 1999, due to increased merchandise sales resulting from higher catalog circulation, greater product offerings, increased Internet traffic and increased advertising revenues. 13 14 Production, distribution and editorial. Production, distribution and editorial expenses increased $24.2 million, or 29.3%, to $107.0 million for the nine months ended September 30, 2000, from $82.8 million for the nine months ended September 30, 1999. Internet/Direct Commerce costs increased $16.9 million due to an increase in cost of goods sold and fulfillment costs, each as a result of higher revenues, as well as increased catalog production and distribution costs resulting from higher catalog circulation. In addition, costs increased due to our continued investment in developing and maintaining our Internet site. Publishing segment costs increased $6.6 million reflecting increased costs for Martha Stewart Living magazine due primarily to an increase in the number of pages printed per issue and additional costs associated with the publication of Martha Stewart Baby and Martha Stewart Holiday- Halloween 2000. Television costs increased $0.7 million, primarily as a result of higher distribution costs associated with revenues received from the second half-hour of our Martha Stewart Living program and the effect of the contract relating to from Martha's Kitchen, resulting in decreased amortization of production costs during the nine months ended September 30, 1999. Selling and promotion. Selling and promotion expenses increased $4.7 million, or 17.0%, to $32.2 million for the nine months ended September 30, 2000, from $27.5 million for the nine months ended September 30, 1999. Publishing segment costs increased $2.7 million resulting from circulation costs incurred to support higher circulation revenues, including revenues from the publication of Martha Stewart Holiday- Halloween 2000 and Martha Stewart Baby. Internet/Direct Commerce segment costs increased $2.0 million resulting from higher costs associated with higher revenues and increased promotion spending. General and administrative. General and administrative expenses increased $4.0 million, or 14.7%, to $31.1 million for the nine months ended September 30, 2000, from $27.1 million for the nine months ended September 30, 1999. The higher expenses have been incurred primarily as a result of higher occupancy costs needed to support growth in headcount, as well as increased compensation costs and costs associated with our becoming a public company in October 1999. Depreciation and amortization. Depreciation and amortization increased $2.3 million, or 50.5% to $6.8 million for the nine months ended September 30, 2000, from $4.5 million for the nine months ended September 30, 1999. The increase is attributable to higher levels of property and equipment. Interest income (expense), net. Interest income (expense), net was $4.1 million for the nine months ended September 30, 2000, compared to interest expense of $0.8 million for the nine months ended September 30, 1999. Interest income for the nine months ended September 30, 2000 resulted from higher cash balances primarily related to the proceeds received from our initial public offering in October 1999. During the nine months ended September 30, 1999, we had outstanding long term debt which resulted in interest expense in that period. Such long-term debt was fully repaid in July 1999. Income tax provision. Income tax provision for the nine months ended September 30, 2000 was $11.8 million, representing a 43.5% effective income tax rate. Income tax provision during the nine months ended September 30, 1999 was $0.9 million. During the nine months ended September 30, 1999, we operated as a limited liability company and were therefore not subject to Federal income tax on our earnings. In connection with our initial public offering in October 1999, we became a "C" corporation and accordingly our earnings became subject to income taxes from that date forward. The pro forma adjustment to income tax provision of $8.4 million reflects the additional taxes that would have been provided had we been a "C" corporation during that time. The effective income tax rate during the nine months ended September 30, 2000 was lower than the pro forma effective income tax rate for the nine months ended September 30, 1999 due primarily to tax exempt interest earned during the 2000 period. Net income. Net income was $15.4 million for the nine months ended September 30, 2000, compared to pro forma net income of $9.3 million for the nine months ended September 30, 1999, as a result of the above mentioned factors. 14 15 Earnings per share. Earnings per share-diluted were $0.31 per share for the nine months ended September 30, 2000. Earnings per share-diluted for the nine months ended September 30, 1999 of $ 0.19 has been computed on a pro forma basis assuming we had been a "C" corporation at January 1, 1999 and the shares issued in connection with our initial public offering and the July 27, 1999 investment by Kleiner Perkins Caufield & Byers in MSLO were outstanding as of January 1, 1999, in order to better reflect comparability between periods. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $118.9 million at September 30, 2000, compared to $154.7 million at December 31, 1999. Cash flows from operating activities were $22.8 million during the nine months ended September 30, 2000 compared to $14.8 million during the nine months ended September 30, 1999, resulting primarily from net income for the period. Cash flows used in investing activities were $26.9 million for the nine months ended September 30, 2000, reflecting a $13.3 million equity investment in BlueLight.com, an e-commerce company, and $13.6 million in capital expenditures for property and equipment. Cash flows used in investing activities were $1.6 million during the nine months ended September 30, 1999, representing capital expenditures for property and equipment. We expect capital expenditures to approximate $25 million in 2000, as we expand our facilities to provide for future growth and continue to invest in our technology infrastructure. We expect capital expenditures to decline to approximately $10-$12 million in 2001. Cash flows used in financing activities for the nine months ended September 30, 2000 were $31.8 million. In March 2000, we repurchased 1.366 million shares of our Class A common stock for $32.5 million from Time Publishing Ventures, Inc. Cash used in financing activities was $5.9 million during the nine months ended September 30, 1999, representing the repayment of $27.7 million of outstanding long-term debt payable to Time Publishing Ventures, Inc. with the proceeds received from a $15 million term loan from Bank of America and existing cash balances. The amount outstanding under the loan was repaid in July 1999 with the net proceeds of $25.0 million received from Kleiner Perkins Caufield & Byers, a venture capital firm, for a 5% equity investment in MSLO. We have a line of credit with Bank of America in the amount of $10.0 million, which is available to us for seasonal working capital requirements and general corporate purposes. As of September 30, 2000, we had no outstanding borrowings under this facility. We believe that our available cash balances, together with any cash generated from operations and any funds available under existing credit facilities will be sufficient to meet our operating and recurring cash needs for foreseeable periods. SEASONALITY AND QUARTERLY FLUCTUATIONS Several of our businesses can experience fluctuations in quarterly performance. For example, Martha Stewart Living magazine will be published eleven times in 2000: three issues in each of the first, second and fourth quarters and two issues in the third quarter. In 2001, Martha Stewart Living magazine will be published twelve times. Martha Stewart Weddings is published four times annually: one issue in each of the second and third quarters and two issues in the fourth quarter. In addition, we periodically publish special interest publications, such as Martha Stewart Baby and Martha Stewart Holiday. Furthermore, the number of advertising pages per issue tends to be higher in issues published in the fourth quarter. Revenue and income from operations for the television segment tend to be higher in the fourth quarter due to generally higher ratings and the broadcast of prime time television specials. Internet/Direct Commerce revenues also tend to be higher in the fourth quarter due to increased consumer spending during that period. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonal nature of certain products. 15 16 PART II: OTHER INFORMATION ITEM 5: OTHER INFORMATION Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of 1995 We have included in this Quarterly Report certain "forward looking statements" as that term is defined in The Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. These statements can be identified by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "potential" or "continue" or the negative of these terms or other comparable terminology. Our actual results may differ materially from those projected in these statements, and factors that could cause such differences include, but are not limited to, downturns in national and/or local economies; a softening of the domestic advertising market; increased consolidation among major advertisers or other events depressing the level of advertising spending; changes in consumer reading, purchasing and/or television viewing patterns; increases in paper, postage or printing costs; technological developments affecting products or methods of distribution such as the Internet or e-commerce; the resolution of issues concerning commercial activities via the Internet, including security, privacy, reliability, cost, ease of use and access and sales taxes; changes in government regulations affecting our industries; and unexpected changes in interest rates. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 27.1 Financial Data Schedule for the Nine Months Ended September 30, 2000. (b) Reports on Form 8-K No reports on Form 8-K have been filed by the Company during the period covered by this report. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARTHA STEWART LIVING OMNIMEDIA, INC. Date: November 13, 2000 By: /s/ Helen Murphy ------------------------------------------- Name: Helen Murphy Title: Chief Financial and Administrative Officer (Duly Authorized Officer and Principal Financial Officer) 17 18 INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 27.1 Financial Data Schedule for the Nine Months Ended September 30, 2000. 18 EX-27.1 2 y42722ex27-1.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Condensed Consolidated Balance Sheet at September 30, 2000 and the Condensed Consolidated Income Statement for the nine months ended September 30, 2000 of Martha Stewart Living Omnimedia, Inc. and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-2000 SEP-30-2000 118,876 0 41,596 0 13,131 182,498 27,772 0 275,468 79,729 0 0 0 485 182,452 275,468 0 200,228 107,040 107,040 70,098 0 (4,086) 27,176 11,823 15,353 0 0 0 15,353 0.31 0.31
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