10-Q 1 y49288e10-q.txt MARTHA STEWART LIVING OMNIMEDIA, INC. 1 SECURITIES AND EXCHANGE COMMISSION 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 March 31, 2001 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 May 10, 2001 Class A, $0.01 par value 14,693,503 Class B, $0.01 par value 33,888,375 --------------- Total 48,581,878 ===============
2 Martha Stewart Living Omnimedia, Inc. Index to Form 10-Q
Page ---- Part I. Financial information Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
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)
March 31, 2001 December 31, (unaudited) 2000 -------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $113,956 $127,425 Accounts receivable, net 51,100 48,993 Inventories 10,421 9,433 Deferred television production costs 4,207 3,949 Other current assets 6,889 6,013 -------------- ------------ Total current assets 186,573 195,813 -------------- ------------ PROPERTY, PLANT AND EQUIPMENT, net 39,572 37,349 -------------- ------------ INTANGIBLE ASSETS, net 50,106 47,207 -------------- ------------ OTHER ASSETS 18,652 17,045 -------------- ------------ Total assets $294,903 $297,414 ============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 34,956 $ 48,340 Accrued payroll and related costs 3,626 7,190 Income taxes payable 4,855 2,590 Current portion of deferred subscription income 32,825 28,782 -------------- ------------ Total current liabilities 76,262 86,902 -------------- ------------ DEFERRED SUBSCRIPTION INCOME 9,805 8,614 -------------- ------------ OTHER NONCURRENT LIABILITIES 5,291 5,782 -------------- ------------ Total liabilities 91,358 101,298 -------------- ------------ SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 14,687 and 14,559 shares outstanding in 2001 and 2000, respectively 147 146 Class B common stock, $.01 par value, 150,000 shares authorized; 33,888 outstanding in 2001 and 2000 339 339 Capital in excess of par value 169,748 168,528 Retained earnings 33,311 27,103 -------------- ------------ Total shareholders' equity 203,545 196,116 -------------- ------------ Total liabilities and shareholders' equity $294,903 $297,414 ============== ============
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 March 31, -------------------- 2001 2000 -------- -------- Revenues Publishing $47,473 $44,969 Television 6,443 7,343 Merchandising 7,828 6,190 Internet/Direct Commerce 9,501 10,644 -------- -------- Total revenues 71,245 69,146 -------- -------- Operating costs and expenses Production, distribution and editorial 35,755 36,133 Selling and promotion 12,434 11,203 General and administrative 10,932 10,351 Depreciation and amortization 2,716 2,112 -------- -------- Total operating costs and expenses 61,837 59,799 -------- -------- Income from operations 9,408 9,347 Interest income, net 1,295 1,385 -------- -------- Income before income taxes 10,703 10,732 Income tax provision 4,495 5,151 -------- -------- Net income $ 6,208 $ 5,581 ======== ======== Basic earnings per share $ 0.13 $ 0.11 -------- -------- Basic average shares outstanding 48,516 49,616 -------- -------- Diluted earnings per share $ 0.13 $ 0.11 -------- -------- Diluted average shares outstanding 49,176 51,164 -------- --------
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 Three Months Ended March 31, 2001 (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, 2001 14,559 $146 33,888 $339 $168,528 $27,103 $196,116 Net income for the period - - - - - 6,208 6,208 Issuance of shares for stock option exercises 128 1 - - 1,220 - 1,221 ------ ------ ------ ------ ---------- -------- -------- Balance at March 31, 2001 14,687 $147 33,888 $339 $169,748 $33,311 $203,545 ====== ====== ====== ====== ========== ======== ========
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)
Three Months Ended March 31, ------------------------- 2001 2000 --------- --------- Cash flows from operating activities Net income $ 6,208 $ 5,581 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 2,716 2,112 Changes in operating assets and liabilities (17,985) (9,184) --------- --------- Net cash used in operating activities, net of assets acquired (9,061) (1,491) --------- --------- Cash flows from investing activities Equity investment -- (13,297) Acquisition of business (3,824) -- Capital expenditures (3,805) (2,353) --------- --------- Net cash used in investing activities (7,629) (15,650) --------- --------- Cash flows from financing activities Repurchase of common stock -- (32,492) Issuance of note payable 2,000 -- Proceeds received from stock option exercises 1,221 -- --------- --------- Net cash provided by (used) in financing activities 3,221 (32,492) --------- --------- Net decrease in cash (13,469) (49,633) Cash and cash equivalents, beginning of period 127,425 154,749 --------- --------- Cash and cash equivalents, end of period $ 113,956 $ 105,116 ========= =========
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) 1. Accounting policies a. General Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as the "Company." 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, 2000. 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. 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:
March 31, December 31, 2001 2000 -------- ----------- Paper $ 4,120 $ 4,151 Product merchandise 6,301 5,282 ------- ------- $10,421 $ 9,433 ======= =======
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 ended March 31, 2001 and 2000 are set forth below:
Three months ended March 31, ------------------- 2001 2000 ------- ------- Numerator for basic and diluted earnings per share- net income available to common shareholders $ 6,208 $ 5,581 ------- ------- Denominator for basic earnings per share- weighted average number of common shares outstanding 48,516 49,616 Effect of dilutive securities- dilutive potential common shares 660 1,548 ------- ------- Denominator for diluted earnings per share- weighted average number of common shares and dilutive potential common shares 49,176 51,164 ------- ------- Earnings per share- basic $ 0.13 $ 0.11 ------- ------- Earnings per share- diluted $ 0.13 $ 0.11 ------- -------
8 9 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) 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, a wedding registry and gift business, and the website marthastewart.com Revenues for each segment are presented in the condensed consolidated income statements. Income from operations for each segment were as follows:
Three Months Ended March 31, ---------------------- 2001 2000 -------- -------- Publishing $ 17,349 $ 17,439 Television 299 1,307 Merchandising 7,560 6,129 Internet/Direct Commerce (5,963) (5,971) -------- -------- Total before corporate charges 19,245 18,904 Corporate (9,837) (9,557) -------- -------- Income from operations $ 9,408 $ 9,347 ======== ========
5. Acquisition of The Wedding List In March 2001, the Company acquired certain assets and liabilities of The Wedding List, a wedding registry and gift business. The purchase price was approximately $3.9 million, consisting of cash of $1.9 million and a short-term note payable of $2.0 million, payable within 90 days of closing. Goodwill of approximately $3.6 million was recognized from the transaction based upon a preliminary estimate of the purchase price. Goodwill will be amortized over twenty years. 6. Supplemental Cash Flow Information
Three Months Ended March 31, --------------------- 2001 2000 -------- -------- Cash paid for interest $ 122 $ 194 Cash paid for income taxes 2,230 344
9 10 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 its subsidiaries. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH 31, 2000
Three Months Ended March 31, --------------------- 2001 2000 -------- -------- (in thousands, except per share amounts) Revenues Publishing $ 47,473 $ 44,969 Television 6,443 7,343 Merchandising 7,828 6,190 Internet/Direct Commerce 9,501 10,644 -------- -------- Total revenues 71,245 69,146 -------- -------- Operating costs and expenses Production, distribution and editorial 35,755 36,133 Selling and promotion 12,434 11,203 General and administrative 10,932 10,351 Depreciation and amortization 2,716 2,112 -------- -------- Total operating costs and expenses 61,837 59,799 -------- -------- Income from operations 9,408 9,347 -------- -------- Interest income , net 1,295 1,385 -------- -------- Income before income taxes 10,703 10,732 -------- -------- Income tax provision 4,495 5,151 -------- -------- Net income 6,208 5,581 ======== ======== Earnings per share- basic $ 0.13 $ 0.11 ======== ======== Earnings per share- diluted $ 0.13 $ 0.11 ======== ========
Revenues. Total revenues increased $2.1 million, or 3.0%, to $71.2 million for the three months ended March 31, 2001, from $69.1 million for the three months ended March 31, 2000. Publishing revenues increased $2.5 million, or 5.5%, to $47.5 million for the three months ended March 31, 2001, from $45.0 million for the three months ended March 31, 2000. This increase was primarily due to revenues from the publication of a custom published magazine, Martha Stewart Everyday Garden, as well as increased newsstand sales of Martha Stewart Living magazine, partially offset by lower advertising revenues in Martha Stewart Living magazine due to lower advertising pages sold. Television revenues decreased $0.9 million, or 12.3%, to $6.4 million for the three months ended March 31, 2001, from $7.3 million for the three months ended March 31, 2000. The decrease is due primarily to lower syndication advertising revenues on the Martha Stewart Living program due to lower ratings and lower cable television advertising revenues due primarily to market conditions. Merchandising revenues increased $1.6 million, or 26.5%, to $7.8 million for the three months ended March 31, 2001, from $6.2 million for the three months ended March 31, 2000, primarily as a result of increased revenues earned on our Martha Stewart Everyday products sold at Kmart. Internet/Direct Commerce revenues decreased $1.1 million, or 10.7%, to $9.5 million for the three months ended March 31, 2001, from $10.6 million for the three months ended March 31, 2000, due to lower advertising revenues of $0.7 million and lower product sales of $0.4 million. Production, distribution and editorial. Production, distribution and editorial expenses decreased $0.4 million, or 1.0%, to $35.8 million for the three months ended March 31, 2001, from $36.1 million for the three months ended March 31, 2000. Publishing segment costs increased $1.8 million primarily from the publication of Martha Stewart Everyday Garden. Internet/Direct Commerce segment costs decreased $2.2 million due to a decrease in cost of goods sold and fulfillment costs, each as a result of lower product 10 11 revenues, and lower catalog production and distribution costs due to lower catalog circulation. Selling and promotion. Selling and promotion expenses increased $1.2 million, or 11.0%, to $12.4 million for the three months ended March 31, 2001, from $11.2 million for the three months ended March 31, 2000. Publishing segment costs increased $0.6 million resulting primarily from higher newsstand circulation costs associated with higher newsstand sales. Internet/Direct Commerce segment costs increased $0.4 million resulting from higher costs associated with increased promotional spending. Television segment costs were $0.2 million higher resulting from the collection in March 2000 of certain previously reserved accounts receivable. General and administrative. General and administrative expenses increased $0.6 million, or 5.6%, to $10.9 million for the three months ended March 31, 2001, from $10.3 million for the three months ended March 31, 2000. The higher expenses were incurred primarily as a result of higher occupancy costs related to our new office facility, which we began occupying in December 2000. Depreciation and amortization. Depreciation and amortization increased $0.6 million, or 28.6%, to $2.7 million for the three months ended March 31, 2001, from $2.1 million for the three months ended March 31, 2000. The increase is primarily due to depreciation of capital expenditures incurred for our new office facility, which we began occupying in December 2000. Interest income, net. Interest income , net was $1.3 million for the three months ended March 31, 2001, compared to $1.4 million for the three months ended March 31, 2000, due to lower average cash balances and lower interest rates during the 2001 quarter. Income tax provision. Income tax provision for the three months ended March 31, 2001 was $4.5 million, representing a 42% effective income tax rate. Income tax provision for the three months ended March 31, 2000 was $5.2 million, representing a 48% effective income tax rate. The lower rate in 2001 is due to the effect of tax-free interest income earned on invested cash. Net income. Net income was $6.2 million for the three months ended March 31, 2001, compared to net income of $5.6 million for the three months ended March 31, 2000, as a result of the above mentioned factors. Earnings per share. Basic and diluted earnings per share were $0.13 per share for the three months ended March 31, 2001, compared to $0.11 for the three months ended March 31, 2000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $114.0 million at March 31, 2001, compared to $127.4 million at December 31, 2000. Cash flows used in operating activities were $9.1 million during the three months ended March 31, 2001, resulting primarily from lower accounts payable and accrued liabilities due to timing of payments. Cash flows used in operating activities were $1.2 million during the three months ended March 31, 2000. Cash flows used in investing activities were $7.6 million for the three months ended March 31, 2001, reflecting a $3.8 million net asset purchase of The Wedding List, and $3.8 million of capital expenditures, primarily for our internet technology upgrade project. Cash flows used in investing activities were $15.7 million during the three months ended March 31, 2000, reflecting a $13.3 million investment in BlueLight.com and capital expenditures of $2.4 million. Cash flows provided by financing activities for the three months ended March 31, 2001 were $3.2 million, representing the issuance of a $2.0 million short term note payable in connection with The Wedding List acquisition and $1.2 million of proceeds received from the exercise of employee stock options. Cash used in financing activities was $32.5 million during the three months ended March 31, 2000, resulting from the repurchase of 1.366 million shares of our Class A common stock for $32.5 million from Time Publishing Ventures, Inc. 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 March 31, 2001, we had no 11 12 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 was 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 segment 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. 12 13 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. Additional information regarding some of these and other important factors that could cause actual results to differ from those in our forward-looking statements is contained in the prospectus forming part of our registration statement on Form S-1 (File No. 333-84001) under the caption "Risk Factors." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No exhibits are filed as part of this report (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. 13 14 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: May 15, 2001 By: /s/ James Follo -------------------------------------------------------- Name: James Follo Title: Executive Vice President, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 14