UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 005-15395
MARTHA STEWART LIVING OMNIMEDIA, INC.
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 52-2187059 |
| | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
11 West 42nd Street, New York, NY | | 10036 |
| | |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)(212) 827-8000
(Former name, former address and former fiscal year,
if changed since last report)
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.
Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
| | | | | | | |
|
| | | | Outstanding as of | | |
| Class | | | November 7, 2005 | | |
| Class A, $0.01 par value | | | | 24,830,576 | | |
| Class B, $0.01 par value | | | | 26,873,512 | | |
| Total | | | | 51,704,088 | | |
|
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
2
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, | |
| | 2005 | | | 2004 | |
| | (unaudited) | | | | | |
ASSETS | | | | | | | | |
CURRENT ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 31,244 | | | $ | 104,647 | |
Short-term investments | | | 90,798 | | | | 35,309 | |
Accounts receivable, net | | | 20,318 | | | | 31,332 | |
Inventories, net | | | 4,838 | | | | 5,229 | |
Deferred television production costs | | | 6,132 | | | | — | |
Income taxes receivable | | | 5,107 | | | | 6,321 | |
Other current assets | �� | | 5,278 | | | | 3,573 | |
| | | | | | |
|
Total current assets | | | 163,715 | | | | 186,411 | |
| | | | | | |
| | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT, net | | | 18,368 | | | | 17,175 | |
| | | | | | | | |
INTANGIBLE ASSETS, net | | | 53,827 | | | | 54,264 | |
| | | | | | | | |
OTHER NONCURRENT ASSETS | | | 5,977 | | | | 6,828 | |
| | | | | | |
Total assets | | $ | 241,887 | | | $ | 264,678 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 27,589 | | | $ | 25,604 | |
Accrued payroll and related costs | | | 9,599 | | | | 9,407 | |
Income taxes payable | | | 365 | | | | 412 | |
Current portion of deferred subscription income | | | 30,100 | | | | 27,160 | |
Current portion of deferred revenue | | | 4,881 | | | | — | |
| | | | | | |
Total current liabilities | | | 72,534 | | | | 62,583 | |
DEFERRED SUBSCRIPTION INCOME | | | 7,545 | | | | 7,668 | |
DEFERRED REVENUE | | | 3,903 | | | | 3,438 | |
OTHER NONCURRENT LIABILITIES | | | 3,088 | | | | 3,361 | |
| | | | | | |
| | | | | | | | |
Total liabilities | | | 87,070 | | | | 77,050 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Class A common stock, $.01 par value, 350,000 shares authorized; 24,637 and 21,660 shares outstanding in 2005 and 2004, respectively | | | 246 | | | | 217 | |
Class B common stock, $.01 par value, 150,000 shares authorized; 26,873 and 29,123 outstanding in 2005 and 2004, respectively | | | 269 | | | | 291 | |
Capital in excess of par value | | | 251,380 | | | | 196,781 | |
Unamortized restricted stock | | | (11,475 | ) | | | (2,793 | ) |
Accumulated deficit | | | (84,828 | ) | | | (6,093 | ) |
| | | | | | |
| | | 155,592 | | | | 188,403 | |
| | | | | | | | |
Less: Class A treasury stock — 59 shares at cost | | | (775 | ) | | | (775 | ) |
| | | | | | |
Total shareholders’ equity | | | 154,817 | | | | 187,628 | |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 241,887 | | | $ | 264,678 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
REVENUES | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Publishing | | $ | 27,564 | | | $ | 22,235 | | | $ | 84,626 | | | $ | 69,905 | |
Television | | | 3,395 | | | | 2,203 | | | | 6,039 | | | | 9,436 | |
Merchandising | | | 8,340 | | | | 8,014 | | | | 27,894 | | | | 29,706 | |
Internet/Direct Commerce | | | 1,555 | | | | 6,201 | | | | 6,912 | | | | 18,179 | |
| | | | | | | | | | | | |
Total revenues | | | 40,854 | | | | 38,653 | | | | 125,471 | | | | 127,226 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
OPERATING COSTS AND EXPENSES | | | | | | | | | | | | | | | | |
Production, distribution and editorial | | | 23,387 | | | | 27,405 | | | | 71,755 | | | | 86,757 | |
Selling and promotion | | | 13,418 | | | | 12,473 | | | | 46,162 | | | | 38,845 | |
General and administrative | | | 15,553 | | | | 12,272 | | | | 45,148 | | | | 43,698 | |
Non-cash equity compensation | | | 13,275 | | | | 990 | | | | 37,770 | | | | 3,469 | |
Depreciation and amortization | | | 2,075 | | | | 1,667 | | | | 5,482 | | | | 4,976 | |
| | | | | | | | | | | | |
Total operating costs and expenses | | | 67,708 | | | | 54,807 | | | | 206,317 | | | | 177,745 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
OPERATING LOSS | | | (26,854 | ) | | | (16,154 | ) | | | (80,846 | ) | | | (50,519 | ) |
Interest income, net | | | 1,033 | | | | 511 | | | | 2,692 | | | | 1,192 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (25,821 | ) | | | (15,643 | ) | | | (78,154 | ) | | | (49,327 | ) |
| | | | | | | | | | | | | | | | |
Income tax (provision) benefit | | | (125 | ) | | | 806 | | | | (207 | ) | | | (2,526 | ) |
| | | | | | | | | | | | |
LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS | | | (25,946 | ) | | | (14,837 | ) | | | (78,361 | ) | | | (51,853 | ) |
| | | | | | | | | | | | | | | | |
Loss from discontinued operations | | | (122 | ) | | | (129 | ) | | | (374 | ) | | | (417 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NET LOSS | | $ | (26,068 | ) | | $ | (14,966 | ) | | $ | (78,735 | ) | | $ | (52,270 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
LOSS PER SHARE — BASIC AND DILUTED | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.51 | ) | | $ | (0.30 | ) | | $ | (1.54 | ) | | $ | (1.05 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Loss from discontinued operations | | | (0.00 | ) | | | (0.00 | ) | | | (0.01 | ) | | | (0.01 | ) |
| | | | | | | | | | | | |
Net loss | | $ | (0.51 | ) | | $ | (0.30 | ) | | $ | (1.55 | ) | | $ | (1.05 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED | | | 50,849 | | | | 49,698 | | | | 50,959 | | | | 49,578 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
4
MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2005
(unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | | Class B | | | | | | | | | | | | | | | Class A | | | | |
| | common stock | | | common stock | | | | | | | | | | | | | | | Treasury Stock | | | | |
| | | | | | | | | | | | | | | | | | Capital in | | | Unamortized | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | excess of | | | Restricted | | | Accumulated | | | | | | | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | par value | | | Stock | | | Deficit | | | Shares | | | Amount | | | Total | |
Balance at January 1, 2005 | | | 21,660 | | | $ | 217 | | | | 29,123 | | | $ | 291 | | | $ | 196,781 | | | $ | (2,793 | ) | | $ | (6,093 | ) | | | (59 | ) | | $ | (775 | ) | | $ | 187,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (78,735 | ) | | | — | | | | — | | | | (78,735 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of shares | | | 1,828 | | | | 18 | | | | (1,828 | ) | | | (18 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares in conjunction with stock options exercises | | | 589 | | | | 6 | | | | — | | | | — | | | | 8,204 | | | | — | | | | — | | | | — | | | | — | | | | 8,210 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares of stock and restricted stock, net of cancellations and tax liabilities | | | 560 | | | | 5 | | | | — | | | | — | | | | 13,419 | | | | (13,480 | ) | | | — | | | | — | | | | — | | | | (56 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expense associated with common stock warrants | | | — | | | | — | | | | — | | | | — | | | | 27,625 | | | | — | | | | — | | | | — | | | | — | | | | 27,625 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash equity compensation | | | — | | | | — | | | | — | | | | — | | | | 5,347 | | | | 4,798 | | | | — | | | | — | | | | — | | | | 10,145 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares returned on a net treasury basis | | | — | | | | — | | | | (422 | ) | | | (4 | ) | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2005 | | | 24,637 | | | $ | 246 | | | | 26,873 | | | $ | 269 | | | $ | 251,380 | | | $ | (11,475 | ) | | $ | (84,828 | ) | | | (59 | ) | | $ | (775 | ) | | $ | 154,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
| | | | | | | | |
| | Nine Months Ended | |
| | September 30, | |
| | 2005 | | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
Net loss | | $ | (78,735 | ) | | $ | (52,270 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 5,482 | | | | 4,976 | |
Non-cash equity compensation | | | 37,770 | | | | 3,469 | |
Deferred income tax expense | | | — | | | | 3,754 | |
Changes in operating assets and liabilities | | | 15,584 | | | | 29,208 | |
| | | | | | |
| | | | | | | | |
Net cash used in operating activities | | | (19,899 | ) | | | (10,863 | ) |
| | | | | | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Capital expenditures | | | (6,225 | ) | | | (810 | ) |
Purchases of short-term investments | | | (125,229 | ) | | | (36,291 | ) |
Sales of short-term investments | | | 69,740 | | | | 500 | |
Acquisitions of businesses, net of cash acquired | | | — | | | | (6,392 | ) |
| | | | | | |
| | | | | | | | |
Net cash used in investing activities | | | (61,714 | ) | | | (42,993 | ) |
| | | | | | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds received from stock option exercises | | | 8,210 | | | | 596 | |
| | | | | | |
| | | | | | | | |
Net cash provided by financing activities | | | 8,210 | | | | 596 | |
| | | | | | |
| | | | | | | | |
Net decrease in cash | | | (73,403 | ) | | | (53,260 | ) |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 104,647 | | | | 165,566 | |
| | | | | | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 31,244 | | | $ | 112,306 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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, 2004.
b. Use of estimates
The preparation of financial statements in conformity with U.S. 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. Television production costs
Television production costs are capitalized and amortized based upon estimates of future revenues to be received for the applicable television product. The Company bases its estimates on existing contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues are adjusted regularly based upon actual results and changes in market and other conditions.
d. Income taxes
The Company follows Statement of Financial Accounting Standards (“SFAS”) 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. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS No. 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year taxable income/loss than it places on estimates of future taxable income. Therefore, the Company has established a valuation allowance of $27,687 in the first nine months of 2005, and a cumulative balance of $59,640 as of September 30, 2005. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax asset could be realized. The Company currently has recorded an accrual of $619 for income tax liabilities related to ongoing federal, state, and local audits. Management believes the ultimate outcome of these audits will not have a material effect on the financial position of the Company. The Company has also recorded a receivable in the amount of $5,107 which represents refundable federal and state income taxes.
e. Stock Compensation
As permitted by SFAS No. 123, “Accounting for Stock Based Compensation,” the Company has elected to continue accounting for employee stock compensation under the APB 25 rules, but also to disclose pro forma results using SFAS No. 123’s alternative accounting treatment, which calculates the total compensation expense to be recognized as the fair value of the award at the date of grant. No option grants were made in the third quarter of 2005. The fair values of options granted during the third quarter of 2004 were
7
estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions: risk free interest rate— 2.73%; dividend yield— zero; expected volatility— 68.5%; expected life— 3 years; average fair market value per option granted— $5.01.
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options over the relevant vesting periods. The pro forma effects on net loss for the three and nine month periods ended September 30, 2005 and 2004 were as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
Net loss, as reported | | $ | (26,068 | ) | | $ | (14,966 | ) | | $ | (78,735 | ) | | $ | (52,270 | ) |
| | | | | | | | | | | | | | | | |
Add back: Total stock-based employee compensation expense included in net loss | | | 939 | | | | 966 | | | | 3,183 | | | | 4,031 | |
| | | | | | | | | | | | | | | | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | | | (1,465 | ) | | | (1,709 | ) | | | (4,246 | ) | | | (5,126 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Pro forma net loss | | $ | (26,595 | ) | | $ | (16,016 | ) | | $ | (79,798 | ) | | $ | (53,365 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Loss per share: | | | | | | | | | | | | | | | | |
Basic and diluted — as reported | | $ | (0.51 | ) | | $ | (0.30 | ) | | $ | (1.55 | ) | | $ | (1.05 | ) |
Basic and diluted — pro forma | | $ | (0.52 | ) | | $ | (0.32 | ) | | $ | (1.57 | ) | | $ | (1.08 | ) |
The nine month period ended September 30, 2005 includes a non-cash equity charge of $16,830 associated with the vesting of 833,333 warrants granted in connection with the production of the syndicated television program. The warrants were valued on the vesting date based upon the Black-Scholes option pricing model using the following assumptions: risk free interest rate— 3.9%; dividend yield— zero; expected volatility— 68%; contractual life— 7 years; average fair market value per option granted— $20.20.
The three and nine month periods ended September 30, 2005 include a non-cash equity charge of $9,552 associated with the vesting of 416,667 warrants granted in connection with the initial airing of a primetime network television series titled “The Apprentice: Martha Stewart”. The warrants were valued on the vesting date based upon the Black-Scholes option pricing model using the following assumptions: risk free interest rate— 4.2%; dividend yield— zero; expected volatility— 67%; contractual life— 6.5 years; average fair market value per option granted— $22.92.
The three and nine month periods ended September 30, 2005 include a non-cash equity charge of $1,242 associated with the amortization of 416,667 warrants granted in connection with the final airing of “The Apprentice: Martha Stewart”. The warrants are expensed over a thirteen episode vesting period during the third and fourth quarters of 2005. The warrants were valued on the reporting period end date based upon the Black-Scholes option pricing model using the following assumptions: risk free interest rate— 4.3%; dividend yield— zero; expected volatility— 67%; contractual life— 6.5 years; average fair market value per option granted— $19.38.
During the first quarter of 2005, the Company granted 200,000 options to the current Chairman of the Board in connection with a consulting agreement. The aggregate value of the options at the grant date, based upon the Black-Scholes option pricing model, was $3,313. The options are revalued each reporting period to reflect fair value based upon the Black-Scholes option pricing model and are expensed over a two year vesting period. The aggregate value of the options as of September 30, 2005 was $3,667. The amount recognized as expense for the three months and nine months ended September 30, 2005 was $300 and $1,222 respectively. The options were valued based upon the Black-Scholes option pricing model using the following assumptions: risk free interest rate— 4.3%; dividend yield— zero; expected volatility— 67%; contractual life— 9.3 years; average fair market value per option granted— $18.33.
8
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) on January 1, 2006.
Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. The “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. The “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
The Company will use the “modified prospective” method to apply Statement 123(R).
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method could have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net loss and Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement could reduce net operating cash flows and increase net financing cash flows in periods after adoption.
2. Inventories
The components of inventories are as follows:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2005 | | | 2004 | |
Paper | | $ | 4,838 | | | $ | 4,279 | |
Product merchandise | | | — | | | | 1,236 | |
| | | | | | |
| | | 4,838 | | | | 5,515 | |
Less: reserve for obsolete and excess inventory | | | — | | | | 286 | |
| | | | | | |
| | $ | 4,838 | | | $ | 5,229 | |
| | | | | | |
3. Loss per share
Loss per share is computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during each period.
9
Diluted loss per share reflects the potential dilution that would occur from the exercise of stock options and warrants and the vesting of restricted stock.
As of September 30, 2005 and 2004, antidilutive options, warrants, and restricted stock that are excluded from the computation of diluted earnings per share because the effect would have been antidilutive were 5,209,155 and 2,530,881, respectively.
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 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. 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 its direct-to-consumer floral business and the website marthastewart.com. Historically, this segment included the Company’s operations relating to its catalog, “Martha Stewart: The Catalog For Living”, which was discontinued in 2004.
The Company believes operating income before depreciation and amortization, and non-cash stock compensation, (“OIDA”), a non-GAAP financial measure, is an appropriate measure when evaluating the operating performance of its business segments and the Company on a consolidated basis. OIDA is among the primary metrics used by management for planning and forecasting of future periods, and is considered an important indicator of the operational strength of the Company’s businesses. OIDA is also used externally by the Company’s investors, analysts, and industry peers. The Company believes the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by the Company’s management and makes it easier to compare the Company’s results with other companies that have different capital structures or tax rates. The Company believes OIDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss), cash flows, and other measures of financial performance prepared in accordance with generally accepted accounting principles (“GAAP”). As OIDA is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similarly titled measures employed by other companies.
10
Revenues for each segment are presented in the condensed consolidated income statements. Income (loss) from operations for each segment are as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | (unaudited) | | | (unaudited) | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
OPERATING INCOME (LOSS) | | | | | | | | | | | | | | | | |
Publishing | | $ | (2,544 | ) | | $ | (5,576 | ) | | $ | (14,526 | ) | | $ | (13,276 | ) |
Television | | | (3,537 | ) | | | (1,822 | ) | | | (25,836 | ) | | | (7,300 | ) |
Merchandising | | | 4,055 | | | | 4,805 | | | | 15,858 | | | | 16,608 | |
Internet/Direct Commerce | | | (963 | ) | | | (2,685 | ) | | | (3,618 | ) | | | (7,790 | ) |
| | | | | | | | | | | | |
Operating Loss before Corporate Expense | | | (2,989 | ) | | | (5,278 | ) | | | (28,122 | ) | | | (11,758 | ) |
Corporate Expense | | | (23,865 | ) | | | (10,876 | ) | | | (52,724 | ) | | | (38,761 | ) |
| | | | | | | | | | | | |
Total Operating Loss | | | (26,854 | ) | | | (16,154 | ) | | | (80,846 | ) | | | (50,519 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
DEPRECIATION AND AMORTIZATION | | | | | | | | | | | | | | | | |
Publishing | | | 247 | | | | 149 | | | | 742 | | | | 269 | |
Television | | | 462 | | | | 57 | | | | 609 | | | | 173 | |
Merchandising | | | 211 | | | | 189 | | | | 629 | | | | 570 | |
Internet/Direct Commerce | | | 231 | | | | 248 | | | | 722 | | | | 740 | |
Corporate Expense | | | 924 | | | | 1,024 | | | | 2,780 | | | | 3,224 | |
| | | | | | | | | | | | |
Total Depreciation and Amortization | | | 2,075 | | | | 1,667 | | | | 5,482 | | | | 4,976 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NON-CASH EQUITY COMPENSATION | | | | | | | | | | | | | | | | |
Publishing | | | 420 | | | | 25 | | | | 1,620 | | | | 127 | |
Television | | | 28 | | | | — | | | | 17,355 | | | | — | |
Merchandising | | | 78 | | | | (97 | ) | | | 232 | | | | (72 | ) |
Internet/Direct Commerce | | | 9 | | | | — | | | | 28 | | | | — | |
Corporate Expense | | | 12,740 | | | | 1,062 | | | | 18,535 | | | | 3,414 | |
| | | | | | | | | | | | |
Total Non-Cash Equity Compensation | | | 13,275 | | | | 990 | | | | 37,770 | | | | 3,469 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND NON-CASH EQUITY COMPENSATION | | | | | | | | | | | | | | | | |
Publishing | | | (1,877 | ) | | | (5,402 | ) | | | (12,164 | ) | | | (12,880 | ) |
Television | | | (3,047 | ) | | | (1,765 | ) | | | (7,872 | ) | | | (7,127 | ) |
Merchandising | | | 4,344 | | | | 4,897 | | | | 16,719 | | | | 17,106 | |
Internet/Direct Commerce | | | (723 | ) | | | (2,437 | ) | | | (2,868 | ) | | | (7,050 | ) |
| | | | | | | | | | | | |
Operating Loss before Depreciation and Amortization and Non-Cash Equity Compensation and before Corporate Expense | | | (1,303 | ) | | | (4,707 | ) | | | (6,185 | ) | | | (9,951 | ) |
Corporate Expense | | | (10,201 | ) | | | (8,790 | ) | | | (31,409 | ) | | | (32,123 | ) |
| | | | | | | | | | | | |
TOTAL OPERATING LOSS BEFORE DEPRECIATION AND AMORTIZATION AND NON-CASH EQUITY COMPENSATION | | $ | (11,504 | ) | | $ | (13,497 | ) | | $ | (37,594 | ) | | $ | (42,074 | ) |
| | | | | | | | | | | | |
11
5. Business Acquisitions
In August 2004, the Company acquired certain assets and liabilities ofBody + Soulmagazine andDr. Andrew Weil’s Self Healingnewsletter, which are publications featuring “natural living” content. The primary purpose of the acquisition was to enter a new market and to launch “natural living” as a new “omni” lifestyle category and brand for the Company. Consistent with SFAS No. 141, “Business Combinations,” the acquisitions were accounted for under purchase accounting.
In connection with the acquisition of the net assets ofBody + Soul, the Company recorded tangible assets of $612, an intangible trademark asset of $300, and assumed liabilities of $2,669 based upon receipt of an asset appraisal performed by an external valuation services firm. Goodwill of $6,613 was recognized as the excess of the purchase price over the fair value of the assets acquired.
In connection with the acquisition of the net assets ofDr. Andrew Weil’s Self Healingnewsletter, the Company recorded tangible assets of $428, an intangible subscriber list asset of $900, an intangible trademark asset of $200 and assumed liabilities of $1,902 based upon receipt of an asset appraisal performed by an external valuation services firm. Goodwill of $2,219 was recognized as the excess of the purchase price over the fair value of the assets acquired.
The intangible subscriber list is subject to an eighteen month amortization period. For the three and nine month periods ended September 30, 2005 approximately $150 and $450 was charged to amortization expense and accumulated amortization, respectively.
6. Related Party Transaction
During the second quarter of 2005, the Company reimbursed Martha Stewart approximately $2,800 for certain expenses relating to her defense of the count of the federal criminal indictment against her alleging she made false and misleading statements intended to influence the price of the Company’s stock. Ms. Stewart’s defense of this count was successful and a judgment of acquittal was entered in her favor. The Company believes that substantially all amounts reimbursed to Ms. Stewart will be reimbursable to the Company under its Directors & Officers insurance policy and, accordingly, has recorded the amount as a receivable as of September 30, 2005.
7. Discontinued Operations
In June 2002, the Company decided to exit The Wedding List, a wedding registry and gift business that was reported within the Internet/Direct Commerce business segment. The loss from operations was as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, (unaudited) | | | September 30, (unaudited) | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
|
Loss from operations | | $ | (122 | ) | | $ | (129 | ) | | $ | (374 | ) | | $ | (417 | ) |
12
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.
EXECUTIVE SUMMARY
TRENDS, RISKS AND UNCERTAINTIES
Since June 2002, as a result of the criminal and civil proceedings and related publicity surrounding Martha Stewart’s sale of non-Company stock, we experienced substantial negative effects on our business. Although we cannot provide any assurances regarding future trends, in 2005 we have begun to see certain improvements in our business. Those improvements principally include an increase in advertising pages and rates as well as improved circulation trends in our flagship magazine,Martha Stewart Living. We are also cautiously optimistic about similar improvements in certain other areas of the Company, including continued improvements in advertising pages and revenue in certain of the Company’s other magazines, as well as the launch of a Martha Stewart-branded satellite radio channel on SIRIUS satellite radio. On September 12, 2005 we launched our new syndicated television program. While initial viewer response to the show has been favorable, ratings for the first seven weeks, although fluid, have been below our budgeted expectations. Accordingly, we now expect to report a loss in the segment for the fourth quarter of 2005. Additionally, during the third quarter, as part of an agreement with Mark Burnett, a well regarded producer of prime-time programming, the Company participated in the production of a primetime network television series titled, “The Apprentice: Martha Stewart.” While MSO does not have a direct financial ownership interest in the prime-time program, we expect to benefit from promotion of the Company’s brands, products and its business. We believe that this program has exposed the brand to a wider audience of viewers, consumers and business partners. Related to this program, we expect to record a non-cash charge of approximately $5.5 million in the fourth quarter due to the vesting of certain previously granted warrants related to “The Apprentice: Martha Stewart.” The actual non-cash charge related to the warrant may vary depending on the final value on the date of vesting. While we account for the non-cash charge based on a fair value methodology, the actual impact to the company and its shareholders in the form of dilution will be the issuance of common shares. Based on a $20 stock price, and the recipient exercising all 2.5 million shares covered by the warrant, the actual shares issued would approximate 1.6 million shares. Currently, of the 2.5 million shares covered by the warrant 1.3 million are vested, and we expect an additional 0.4 million to vest in the fourth quarter.
In August 2004, we decided to discontinue “Martha Stewart: The Catalog for Living” and its online product offerings, which are included in the Internet/Direct Commerce segment. The operations of the Catalog for Living and the online component of this business were not profitable. Currently, the Internet/Direct Commerce segment principally consists of an online floral business, marthasflowers.com, as well as the online content portion of our business. As a result of the changes to the business, we expect to see a further reduction in revenue and operating costs and a reduced operating loss in this segment in the near term.
The Company’s current agreement with Kmart provides for certain minimum guaranteed royalty payments. Due principally to store closures (since the signing of the agreement in June 2001, Kmart has closed approximately 30% of its stores) and lower same-store sales, we expect the minimum guarantees will exceed the royalties that otherwise would be earned from actual retail sales through 2007. For the contract years ending January 31, 2009 and 2010 (the extension years), the minimum guarantees will be substantially lower than in prior years. The specific computation is discussed in the paragraph below. The following are the minimum guaranteed royalty payments (in millions) over the term of the agreement:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 1/31/02 | | | 1/31/03 | | | 1/31/04 | | | 1/31/05 | | | 1/31/06 | | | 1/31/07 | | | 1/31/08 | |
Minimum Royalty Amounts | | $ | 15.3 | | | $ | 40.4 | | | $ | 47.5 | | | $ | 49.0 | | | $ | 54.0 | | | $ | 59.0 | | | $ | 65.0 | |
For the year ending January 31, 2009, the minimum royalty amount is the greater of $20 million or 50% of the earned royalty for the year ending January 31, 2008. For the year ending January 31, 2010 the minimum royalty amount is the greater of $15 million or 50% of the earned royalty for the year ending January 31, 2009. Furthermore, up to $3.8 million of the January 31, 2005 and January 31, 2006 minimum royalty payments and $2.5 million of the January 31, 2007 and January 31, 2008 minimum royalty payments, but not more than $10.0 million in the aggregate over the term of the agreement, will be deferred and subject to recoupment in the periods ending January 31, 2009 and January 31, 2010.
13
Results of Operations
Comparison of Three Months Ended September 30, 2005 to Three Months Ended September 30, 2004
PUBLISHING SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Publishing Revenue | | | | | | | | | | | | |
Advertising | | $ | 10,806 | | | $ | 7,501 | | | $ | 3,305 | |
Circulation | | | 16,074 | | | | 14,335 | | | | 1,739 | |
Other | | | 684 | | | | 399 | | | | 285 | |
| | | | | | | | | |
Total Publishing Segment Revenue | | | 27,564 | | | | 22,235 | | | | 5,329 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Publishing Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 17,281 | | | | 15,342 | | | | (1,939 | ) |
Selling and promotion | | | 11,401 | | | | 11,679 | | | | 278 | |
General and administrative | | | 759 | | | | 616 | | | | (143 | ) |
Non-cash compensation expense | | | 420 | | | | 25 | | | | (395 | ) |
Depreciation and amortization | | | 247 | | | | 149 | | | | (98 | ) |
| | | | | | | | | |
Total Publishing Operating Costs and Expenses | | | 30,108 | | | | 27,811 | | | | (2,297 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (2,544 | ) | | $ | (5,576 | ) | | $ | 3,032 | |
| | | | | | | | | |
Publishing revenues increased $5.3 million, or 24%, to $27.6 million for the three months ended September 30, 2005, from $22.2 million for the three months ended September 30, 2004. Advertising revenue increased $3.3 million, primarily due to an increase in both advertising pages and rate inMartha Stewart Livingmagazine which accounted for $3.5 million of the increase. Circulation revenue increased $1.7 million primarily due to an increase in units sold ofMartha Stewart Livingas well as an increase in the subscription revenue per copy. The increase was also attributable to the acquisition of Body & Soul Omnimedia, Inc. (which includes bothBody + Soul magazine as well asDr. Andrew Weil’s Self Healingnewsletter) in August of 2004 which increased $1.0 million in the current quarter.
Magazine Publication Schedule
| | | | |
| | Third Quarter 2005 | | Third Quarter 2004 |
|
Martha Stewart Living | | Three Issues | | Three Issues |
Martha Stewart Weddings | | No Issue | | No Issue |
Everyday Food | | Two Issues | | Two Issues |
Special Interest Publications | | Two Issues | | Three Issues |
Body + Soul (a) | | Two Issues | | Two Issues |
Dr. Andrew Weil’s Self Healing | | Three Issues | | Two Issues |
Newsletter (a) | | | | |
| | |
(a) | | The titles were acquired in August 2004; therefore, prior year amounts are not comparable. |
Production, distribution and editorial expenses increased $1.9 million, primarily reflecting the additional costs associated with the increase in advertising pages inMartha Stewart Living, which results in higher paper, printing and postage costs, as well as the costs associated with Body & Soul Omnimedia, Inc., partially offset by a reduction in costs associated with publishing one fewer issue ofKids: Fun Stuff to do Togetherin the period. The increase is also due in part to higher compensation costs related to an increase in advertising staffing levels. Selling and promotion decreased $0.3 million due primarily to lower subscription acquisition costs in bothMartha Stewart LivingandEveryday Foodpartially offset by higher compensation costs related to an increase in advertising revenue. Additionally, the prior year period included costs associated with anEveryday Foodmarketing campaign.
14
TELEVISION SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Television Revenue | | | | | | | | | | | | |
Advertising | | $ | 1,421 | | | $ | 606 | | | $ | 815 | |
Licensing and other | | | 1,974 | | | | 1,597 | | | | 377 | |
| | | | | | | | | |
Total Television Segment Revenue | | | 3,395 | | | | 2,203 | | | | 1,192 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Television Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 2,265 | | | | 3,036 | | | | 771 | |
Selling and promotion | | | 1,511 | | | | 125 | | | | (1,386 | ) |
General and administrative | | | 2,666 | | | | 807 | | | | (1,859 | ) |
Non-cash equity compensation | | | 28 | | | | — | | | | (28 | ) |
Depreciation and amortization | | | 462 | | | | 57 | | | | (405 | ) |
| | | | | | | | | |
Total Television Operating Costs and Expenses | | | 6,932 | | | | 4,025 | | | | (2,907 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (3,537 | ) | | $ | (1,822 | ) | | $ | (1,715 | ) |
| | | | | | | | | |
Television revenues increased $1.2 million, or 54%, to $3.4 million for the quarter ended September 30, 2005, from $2.2 million for the quarter ended September 30, 2004. Both advertising and licensing revenue increased primarily due to the inclusion of three weeks of revenue related to our new nationally syndicated program which launched on September 12, 2005.
Production, distribution and editorial expenses decreased $0.7 million due principally to the launch of our syndicated program which allowed us to defer certain production costs for matching against future revenue. As of September 30, 2005 our deferred production cost balance was $6.1 million, an increase of $4.1 million from the balance of $2.0 million on June 30, 2005. Selling and promotion expense increased $1.4 million in the quarter principally due to marketing associated with the launch of our syndicated program. General and administrative expense increased $1.9 million primarily due to higher professional fees and increased occupancy costs. The current quarter included only three weeks of revenue related to our new program as well as certain up-front costs related to the launch.
15
MERCHANDISING SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Merchandising Revenue | | | | | | | | | | | | |
Kmart earned royalty | | $ | 6,654 | | | $ | 6,849 | | | $ | (195 | ) |
Kmart minimum true-up | | | — | | | | — | | | | — | |
Other | | | 1,686 | | | | 1,165 | | | | 521 | |
| | | | | | | | | |
Total Merchandising Segment Revenue | | | 8,340 | | | | 8,014 | | | | 326 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Merchandising Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 2,060 | | | | 1,712 | | | | (348 | ) |
Selling and promotion | | | 188 | | | | 196 | | | | 8 | |
General and administrative | | | 1,748 | | | | 1,209 | | | | (539 | ) |
Non-cash compensation expense | | | 78 | | | | (97 | ) | | | (175 | ) |
Depreciation and amortization | | | 211 | | | | 189 | | | | (22 | ) |
| | | | | | | | | |
Total Merchandising Operating Costs and Expenses | | | 4,285 | | | | 3,209 | | | | (1,076 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Income | | $ | 4,055 | | | $ | 4,805 | | | $ | (750 | ) |
| | | | | | | | | |
Merchandising revenues increased $0.3 million, or 4%, to $8.3 million for the quarter ended September 30, 2005, from $8.0 million for the quarter ended September 30, 2004, primarily due to higher revenue from our program with Sears Canada due to minimum royalty payments, partially offset by lower sales of our Martha Stewart Everyday products at Kmart due to lower total store sales. The revenue decline was partially offset by an increase in the royalty rate on a year-over-year basis. The royalty rate under our agreement with Kmart increased by approximately 3% on February 1, 2005.
Production, distribution and editorial as well as general and administrative expenses increased principally due to higher employee compensation.
16
INTERNET/DIRECT COMMERCE SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Internet/Direct Commerce Revenue | | | | | | | | | | | | |
Product | | $ | 1,109 | | | $ | 5,978 | | | $ | (4,869 | ) |
Other | | | 446 | | | | 223 | | | | 223 | |
| | | | | | | | | |
Total Internet/Direct Commerce Segment Revenue | | | 1,555 | | | | 6,201 | | | | (4,646 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Internet/Direct Commerce Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 1,683 | | | | 7,223 | | | | 5,540 | |
Selling and promotion | | | 297 | | | | 447 | | | | 150 | |
General and administrative | | | 298 | | | | 968 | | | | 670 | |
Non-cash compensation expense | | | 9 | | | | — | | | | (9 | ) |
Depreciation and amortization | | | 231 | | | | 248 | | | | 17 | |
| | | | | | | | | |
Total Internet/Direct Commerce Operating Costs and Expenses | | | 2,518 | | | | 8,886 | | | | 6,368 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (963 | ) | | $ | (2,685 | ) | | $ | 1,722 | |
| | | | | | | | | |
Internet/Direct Commerce revenues decreased $4.6 million, to $1.6 million for the three months ended September 30, 2005, from $6.2 million for the three months ended September 30, 2004. The decrease was primarily due to lower commerce sales related to our catalog offerings, partially offset by increased revenue from our direct-to-consumer floral business and higher advertising revenue. The decline in commerce sales related to our catalog offerings was largely attributable to the discontinuance of “Martha Stewart: The Catalog for Living in 2004.” As a result of this action, we expect to see a continued reduction in revenue and operating costs and a reduced operating loss in this segment in 2005.
Production, distribution and editorial costs decreased $5.5 million due to lower product sales, which resulted in lower cost of goods sold as well as lower fulfillment expenses. Catalog production and distribution costs also decreased in the quarter as we discontinued mailing the catalog. The segment also benefited from lower staffing levels. General and administrative expenses decreased $0.7 million due to lower occupancy-related costs.
17
CORPORATE
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Corporate Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | $ | 98 | | | $ | 92 | | | $ | (6 | ) |
Selling and promotion | | | 21 | | | | 26 | | | | 5 | |
General and administrative | | | 10,082 | | | | 8,672 | | | | (1,410 | ) |
Non-cash compensation expense | | | 12,740 | | | | 1,062 | | | | (11,678 | ) |
Depreciation and amortization | | | 924 | | | | 1,024 | | | | 100 | |
| | | | | | | | | |
Total Corporate Operating Costs and Expenses | | | 23,865 | | | | 10,876 | | | | (12,989 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (23,865 | ) | | $ | (10,876 | ) | | $ | (12,989 | ) |
| | | | | | | | | |
Corporate operating costs and expenses increased $13.0 million, to $23.9 million for the three months ended September 30, 2005, from $10.9 million for the three months ended September 30, 2004. General and administrative expenses increased $1.4 million, principally due to higher professional fees including legal and consulting fees as well as higher occupancy costs related to the expense associated with facility space that was previously included in the Internet/Direct Commerce segment which is now included in Corporate. These costs were partially offset by the absence of employee retention expenses. The increase in non-cash compensation expense is principally related to a $10.8 million charge related to the vesting of certain warrants granted in connection with the airing of “The Apprentice: Martha Stewart.” The valuation methodology supporting the non-cash charge related to the warrants is described in Note 1 to the condensed consolidated financial statements and is based on a fair value methodology. Additionally, the company currently expects to take a charge of $1.7 million ($1.1 million non-cash compensation and $0.6 million cash compensation) in the fourth quarter related to a consulting agreement approved subsequent to quarter-end with the Chairman of the Board.
OTHER ITEMS
Income tax benefit (expense). Income tax expense for the quarter ended September 30, 2005 was ($0.1) million, compared to an income tax benefit of $0.8 million for the quarter ended September 30, 2004. The current period provision includes a valuation allowance of $9.2 million against certain deferred tax assets.
Loss from discontinued operations. Loss from discontinued operations was $0.1 in both the current and prior year periods. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are primarily facility related.
Net Loss. Net loss was $(26.1) million for the quarter ended September 30, 2005, compared to a net loss of $(15.0) million for the quarter ended September 30, 2004, as a result of the above mentioned factors.
18
Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended September 30, 2004
PUBLISHING SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Publishing Revenue | | | | | | | | | | | | |
Advertising | | $ | 33,101 | | | $ | 24,055 | | | $ | 9,046 | |
Circulation | | | 49,847 | | | | 44,690 | | | | 5,157 | |
Other | | | 1,678 | | | | 1,160 | | | | 518 | |
| | | | | | | | | |
Total Publishing Segment Revenue | | | 84,626 | | | | 69,905 | | | | 14,721 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Publishing Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 52,264 | | | | 45,761 | | | | (6,503 | ) |
Selling and promotion | | | 42,495 | | | | 35,540 | | | | (6,955 | ) |
General and administrative | | | 2,031 | | | | 1,484 | | | | (547 | ) |
Non-cash compensation expense | | | 1,620 | | | | 127 | | | | (1,493 | ) |
Depreciation and amortization | | | 742 | | | | 269 | | | | (473 | ) |
| | | | | | | | | |
Total Publishing Operating Costs and Expenses | | | 99,152 | | | | 83,181 | | | | (15,971 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (14,526 | ) | | $ | (13,276 | ) | | $ | (1,250 | ) |
| | | | | | | | | |
Publishing revenues increased $14.7 million, or 21%, to $84.6 million for the nine months ended September 30, 2005, from $69.9 million for the nine months ended September 30, 2004. Advertising revenue increased $9.1 million, primarily due to an increase in both advertising pages and rate in bothMartha Stewart LivingandEveryday Foodmagazines, which accounted for $6.2 million and $1.8 million of the increase, respectively. The increase was also attributable to the acquisition of Body & Soul Omnimedia, Inc. (which includes bothBody + Soulmagazine as well asDr. Andrew Weil’s Self Healingnewsletter) in August of 2004, which contributed $2.8 million to advertising revenue in the 2005 period. Circulation revenue increased $5.2 million, primarily due to the addition of Body & Soul Omnimedia, Inc., which accounted for $2.8 million of the increase, and an increase in revenue fromMartha Stewart Livingof $2.0 million andEveryday Foodof $0.8 million, both resulting from higher subscription revenues.
Magazine Publication Schedule
| | | | |
| | Nine months ended September 2005 | | Nine months ended September 2004 |
|
Martha Stewart Living | | Nine Issues | | Nine Issues |
Martha Stewart Weddings | | Three Issue | | Three Issue |
Everyday Food | | Eight Issues | | Eight Issues |
Special Interest Publications | | Five Issues | | Seven Issues |
Body + Soul (a) | | Six Issues | | Two Issues |
Dr. Andrew Weil’s Self | | 12 Issues | | Five Issues |
Healing Newsletter (a) | | | | |
| | |
(a) | | The titles were acquired in August 2004; therefore, prior year amounts are not comparable. |
Production, distribution and editorial expenses increased $6.5 million primarily reflecting costs associated with the increase in advertising pages inMartha Stewart Living, the addition of the Body & Soul group, as well as the additional costs associated with an increase in both pages and total number of units printed forEveryday Foodmagazine related to an increase in circulation, which results in higher paper, printing and postage costs. The increase was partially offset by lower paper, printing and distribution costs ofKids: Fun Stuff To Do Togethermagazine, due to the reduced frequency. Selling and promotion expenses increased $7.0 million primarily due to costs associated with the Body & Soul group acquisition, higher circulation costs forMartha Stewart Livingdue to higher volume of subscription acquisition mailings, as well as employee related costs including severance. The increase was partially offset by lower circulation costs forEveryday Foodmagazine, as the prior year period included costs associated with the magazine’s rapid circulation growth, as well as a reduction in marketing efforts
19
for theKids: Fun Stuff To Do Togethermagazine. The increase in non-cash equity compensation included employee severance costs, as well as costs associated with the company’s annual equity grant.
TELEVISION SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Television Revenue | | | | | | | | | | | | |
Advertising | | $ | 2,199 | | | $ | 3,742 | | | $ | (1,543 | ) |
Licensing and other | | | 3,840 | | | | 5,694 | | | | (1,854 | ) |
| | | | | | | | | |
Total Television Segment Revenue | | | 6,039 | | | �� | 9,436 | | | | (3,397 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Television Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 4,996 | | | | 12,914 | | | | 7,918 | |
Selling and promotion | | | 2,554 | | | | 1,023 | | | | (1,531 | ) |
General and administrative | | | 6,361 | | | | 2,626 | | | | (3,735 | ) |
Non-cash compensation expense | | | 17,355 | | | | — | | | | (17,355 | ) |
Depreciation and amortization | | | 609 | | | | 173 | | | | (436 | ) |
| | | | | | | | | |
Total Television Operating Costs and Expenses | | | 31,875 | | | | 16,736 | | | | (15,139 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (25,836 | ) | | $ | (7,300 | ) | | $ | (18,536 | ) |
| | | | | | | | | |
Television revenues decreased $3.4 million, or 36% to $6.0 million for the nine months ended September 30, 2005, from $9.4 million for the nine months ended September 30, 2004. The decrease is primarily due to the absence of revenue from our syndicated daily program, which did not air from September 2004 through mid September 2005.
Production, distribution and editorial expenses decreased $7.9 million as the prior year amounts included production costs related to our old show for the majority of the year, while the current period only includes amounts recognized related to our new show which launched in September 2005. Selling and promotion expense increased $1.5 million due principally to marketing spending associated with the launch of our syndicated program. General and administrative expense increased $3.7 million primarily due to higher professional fees and increased occupancy costs. Non-cash equity compensation includes a $16.8 million charge related to the vesting of certain warrants granted in connection with our syndicated show.
20
MERCHANDISING SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Merchandising Revenue | | | | | | | | | | | | |
Kmart earned royalty | | $ | 21,772 | | | $ | 22,713 | | | $ | (941 | ) |
Kmart minimum true-up | | | 2,078 | | | | 2,412 | | | | (334 | ) |
Other | | | 4,044 | | | | 4,581 | | | | (537 | ) |
| | | | | | | | | |
Total Merchandising Segment Revenue | | | 27,894 | | | | 29,706 | | | | (1,812 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Merchandising Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 6,261 | | | | 6,875 | | | | 614 | |
Selling and promotion | | | 136 | | | | 767 | | | | 631 | |
General and administrative | | | 4,778 | | | | 4,958 | | | | 180 | |
Non-cash equity compensation | | | 232 | | | | (72 | ) | | | (304 | ) |
Depreciation and amortization | | | 629 | | | | 570 | | | | (59 | ) |
| | | | | | | | | |
Total Merchandising Operating Costs and Expenses | | | 12,036 | | | | 13,098 | | | | 1,062 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Income | | $ | 15,858 | | | $ | 16,608 | | | $ | (750 | ) |
| | | | | | | | | |
Merchandising revenues decreased $1.8 million, or 6%, to $27.9 million for the nine months ended September 30, 2005, from $29.7 million for the nine months ended September 30, 2004, primarily due to lower product sales at Kmart as a result of lower total store sales, partially offset by minimum royalty payments from Sears Canada. The revenue decline at Kmart was partially offset by an increase in the royalty rate on a year-over-year basis. The royalty rate under our agreement with Kmart increased approximately 3% on February 1, 2005. The Kmart minimum true-up is the pro-rata portion of revenue related to the contractual minimum royalty amounts covering the first quarter, net of amounts subject to recoupment. Other revenue declined in the quarters principally due to the absence of royalty revenue from the Martha Stewart Signature Flooring program which was terminated in late 2004, as well as lower sales of our Martha Stewart Signature Furniture program.
Production, distribution and editorial expense decreased $0.6 million due to lower compensation costs. Selling and promotion expenses decreased $0.6 million in the period due to lower marketing expenses related to our Martha Stewart Signature program. General and administrative expense decreased $0.2 million with lower professional fees partially offset by higher compensation related costs. Total compensation costs in the segment increased for the year-to-date period.
21
INTERNET/DIRECT COMMERCE SEGMENT
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Internet/Direct Commerce Revenue | | | | | | | | | | | | |
Product sale | | $ | 6,081 | | | $ | 17,704 | | | $ | (11,623 | ) |
Other | | | 831 | | | | 475 | | | | 356 | |
| | | | | | | | | |
Total Internet/Direct Commerce Segment Revenue | | | 6,912 | | | | 18,179 | | | | (11,267 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Internet/Direct Commerce Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | | 7,941 | | | | 20,930 | | | | 12,989 | |
Selling and promotion | | | 912 | | | | 1,438 | | | | 526 | |
General and administrative | | | 927 | | | | 2,861 | | | | 1,934 | |
Non-cash compensation expense | | | 28 | | | | — | | | | (28 | ) |
Depreciation and amortization | | | 722 | | | | 740 | | | | 18 | |
| | | | | | | | | |
Total Internet/Direct Commerce Operating Costs and Expenses | | | 10,530 | | | | 25,969 | | | | 15,439 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (3,618 | ) | | $ | (7,790 | ) | | $ | 4,172 | |
| | | | | | | | | |
Internet/Direct Commerce revenues decreased $11.3 million, or 62%, to $6.9 million for the nine months ended September 30, 2005, from $18.2 million for the nine months ended September 30, 2004. The decrease was primarily due to lower commerce sales related to our catalog offerings, partially offset by increased revenue from our direct-to-consumer floral business and higher advertising revenue. The decline in commerce sale was largely attributable to the discontinued Martha Stewart: The Catalog for Living in 2004. As a result of this action, we expect to see a continued reduction in revenue, operating costs and a reduced operating loss in this segment in 2005.
Production, distribution and editorial costs decreased $13.0 million, or 62%, due to lower product sales, which resulted in lower cost of goods sold as well as lower fulfillment expenses. Catalog production and distribution costs also decreased in the nine month period as we discontinued mailing the catalog. The segment also benefited from lower staffing levels. General and administrative expenses decreased $1.9 million due primarily to lower occupancy related costs.
22
CORPORATE
| | | | | | | | | | | | |
| | 2005 | | | 2004 | | | | |
| | (unaudited) | | | (unaudited) | | | Variance | |
Corporate Operating Costs and Expenses | | | | | | | | | | | | |
Production, distribution and editorial | | $ | 293 | | | $ | 277 | | | $ | (16 | ) |
Selling and promotion | | | 65 | | | | 77 | | | | 12 | |
General and administrative | | | 31,051 | | | | 31,769 | | | | 718 | |
Non-cash compensation expense | | | 18,535 | | | | 3,414 | | | | (15,121 | ) |
Depreciation and amortization | | | 2,780 | | | | 3,224 | | | | 444 | |
| | | | | | | | | |
Total Corporate Operating Costs and Expenses | | | 52,724 | | | | 38,761 | | | | (13,963 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
Operating Loss | | $ | (52,724 | ) | | $ | (38,761 | ) | | $ | (13,963 | ) |
| | | | | | | | | |
General and administrative expenses decreased $0.7 million principally resulting from the expiration of certain employee retention programs, lower professional fees due to the recovery through directors and officers insurance of certain legal fees and lower location fees. The decrease was partially offset by higher occupancy related costs, as occupancy costs previously allocated to the Internet/Direct Commerce segment are now included in this segment. The increase in non-cash compensation expense is principally related to the vesting of certain warrants granted in connection with the airing of “The Apprentice: Martha Stewart”. The increase is also attributable to higher employee and director equity grants.
OTHER ITEMS
Income tax benefit (expense). Income tax expense for the nine months ended September 30, 2005 was ($0.2) million, compared to an income tax benefit of $2.5 million for the nine months ended September 30, 2004. The current period provision includes a valuation allowance of $27.7 million taken against certain deferred tax assets.
Loss from discontinued operations. Loss from discontinued operations was $0.4 million for both the nine months ended September 30, 2005 and the nine months ended September 30, 2004. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are primarily facility related.
Net Loss. Net loss was ($78.7) million for the nine months ended September 30, 2005, compared to a net loss ($52.3) million for the nine months ended September 30, 2004, as a result of the above mentioned factors.
Liquidity and Capital Resources
Cash and cash equivalents were $31.2 million and $104.6 million and short-term investments were $90.8 million and $35.3 million at September 30, 2005 and December 31, 2004, respectively. In total, cash and cash equivalents along with short-term investments, were $135.8 million and $126.1 million at September 30, 2005 and December 31, 2004, respectively.
Cash flows used in operating activities were $19.9 million and $10.9 million during the nine months ended September 30, 2005 and 2004, respectively. Cash flows used in operating activities during the nine months ended September 30, 2005 were primarily due to a net loss for the period of $78.7 million, partially offset by amortization of equity-based compensation expense of $37.8 million, changes in operating assets and liabilities of $15.6 million and depreciation and amortization of $5.5 million. The changes in operating assets and liabilities included a decrease in accounts receivable due to the collection of a royalty receivable due from Kmart related to our minimum royalty payment, partially offset by the deferral of television production costs related to our new syndicated program. Cash flows used in operating activities during the nine months ended September 30, 2004 were primarily due to a net loss for the period of $52.3 million and decreases in operating assets and liabilities of $29.2 million, partially offset by depreciation and amortization of $5.0 million. The changes in operating assets and liabilities include a decrease in accounts receivable due principally to lower advertising revenue, offset by a decrease in accounts payable and lower deferred subscription income.
23
Cash flows used in investing activities were $61.7 million during the nine months ended September 30, 2005, compared to cash flows used in investing activities of $43.0 million during the nine months ended September 30, 2004. Cash flows used in investing activities in 2005 resulted from the net purchase of short-term investments of $55.5 million, as well as capital expenditures of $6.2 million. Cash flows used in investing activities in 2004 resulted from the net purchase of short-term investments of $35.8 million, the acquisition of certain assets ofBody & Soulmagazine and theDr. Weil Self Healingnewsletter of $6.4 million and capital expenditures of $0.8 million.
Cash flows provided by financing activities for the nine month periods ended September 30, 2005 and 2004 were $8.2 million and $0.6 million, respectively, representing proceeds received from the exercise of employee stock options.
We have a line of credit with Bank of America in the amount of $5 million, which is generally used to secure outstanding letters of credit. As of September 30, 2005, the Company had outstanding letters of credit of $2.1 million as security for certain leases and no outstanding borrowings under this facility.
We believe that our available cash balances and short-term investments together with any funds available under existing credit facilities will be sufficient to meet our operating and recurring cash needs for foreseeable periods. We have not paid dividends on our common stock and have no intention to pay any dividends in the foreseeable future.
Seasonality and Quarterly Fluctuations
Several of our businesses can experience fluctuations in quarterly performance. For example, our Publishing segment results can vary from quarter to quarter due to publication schedules. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined. Revenues from our Television segment will significantly increase beginning in September 2005 with the launch of our new syndicated television program.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies, the following may involve the highest degree of judgment and complexity.
Revenue Recognition
We recognize revenues when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Newsstand revenues in our Publishing segment and product sales in our Internet/Direct Commerce segment are recognized based upon assumptions with respect to future returns. We base our estimates on our historical experience and current market conditions. Reserves are adjusted regularly based upon actual results. We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial
24
condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Revenues for royalties in our merchandising business are accrued on a monthly basis based on sales volume data provided to us by our partners and payment is generally made by our partners on a quarterly basis. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined. Some of our other merchandising agreements also contain minimum guarantee provisions. These minimum guarantees will be recorded when such amounts are both determinable and deemed collectible. Television advertising revenues are recorded when the related commercial is aired and is recorded net of estimated reserves for television audience underdelivery. Television royalties are recorded as earned in accordance with specific terms of each agreement.
Television production costs
Television production costs are capitalized and amortized based upon estimates of future revenues to be received for the applicable television product. The Company bases its estimates on existing contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues are adjusted regularly based upon actual results and changes in market and other conditions.
Intangible assets
A substantial portion of our intangible assets is goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. All of the Company’s goodwill is attributable to certain magazines in its Publishing segment. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Our impairment review process compares the fair value of the reporting unit (magazines) in which the goodwill resides to its carrying value.
In 2004, the Company engaged an external valuation services firm to report on the fair value of the Company’s goodwill. In 2003, the Company estimated future cash flows based upon individual magazine historical results, current trends and operating cash flows to access the fair value. No impairment charges were recorded in 2004 and 2003.
Long-Lived Assets
We review the carrying values of our long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge.
Advertising Cost
Advertising costs, consisting primarily of direct-response advertising, are expensed in the period in which the advertising effort takes place.
Forward-looking Statements and Risk Factors
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 current beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. 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. The Company’s actual results may differ materially from those projected in these statements, and factors that could cause such differences include:
| • | | adverse reactions to publicity relating to Martha Stewart by consumers, advertisers and business partners, including an adverse reaction to the resolution of legal proceedings in which she is a party; |
|
| • | | adverse resolution of some or all of the Company’s ongoing litigation; |
|
| • | | downturns in national and/or local economies; |
|
| • | | shifts in our business strategies; |
25
| • | | a loss of the services of Ms. Stewart; |
|
| • | | a loss of the services of other key personnel; |
|
| • | | a softening of the domestic advertising market; |
|
| • | | changes in consumer reading, purchasing and/or television viewing patterns; |
|
| • | | unanticipated increases in paper, postage or printing costs; |
|
| • | | operational or financial problems at any of our contractual business partners; |
|
| • | | the receptivity of consumers to our new product introductions; and, |
|
| • | | changes in government regulations affecting the Company’s industries. |
Certain of these and other factors are discussed in more detail in other parts of this report, especially in the sections, “Business — Recent Developments” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
ITEM 4. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made know to the officers who certify the Company’s financial reports and to the other members of senior management and the Board of Directors.
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14 (c) under the Securities Exchange Act of 1934) as of September 30, 2005. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. In connection with the launch of our new nationally syndicated television program, the Company completed an advertising billing system implementation and, accordingly, designed and applied related internal controls in the third quarter. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934), occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 3, 2003, the Company was named as a defendant in a Consolidated and Amended Class Action Complaint (the “Consolidated Class Action Complaint”), filed in the United States District Court for the Southern District of New York, by plaintiffs purporting to represent a class of persons who purchased common stock in the Company between January 8, 2002 and October 2, 2002. In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The Consolidated Class Action Complaint also names Martha Stewart and seven of the Company’s other present or former officers (Gregory R. Blatt, Sharon L. Patrick, and five other Company officers) as defendants. All such individuals other than Martha Stewart are collectively referred to herein as the “Individual Defendants.” The action consolidated seven class actions previously filed in the Southern District of New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002), Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002), MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002), Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002), Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002), Steele v. Martha Stewart Living Omnimedia, Inc. (filed September 13, 2002), and Hackbarth v Martha Stewart Living Omnimedia, Inc. (filed September 18, 2002). The claims in the Consolidated Class Action Complaint arise out of Ms. Stewart’s sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The plaintiffs assert violations of Sections 10(b) (and rules promulgated thereunder), 20(a) and 20A of the Securities Exchange Act of 1934. The plaintiffs allege that MSO, Ms. Stewart and the Individual Defendants omitted material information and made statements about Ms. Stewart’s sale that were materially false and misleading. The plaintiffs allege that, as a result of these false and misleading statements, the market price of the Company’s stock was inflated during the putative class periods and dropped after the alleged falsity of the statements became public. The plaintiffs further alleged that the Individual Defendants traded MSO stock while in possession of material non-public information, but as explained below, all such allegations have been dismissed. The Consolidated Class Action Complaint seeks certification as a class action, damages, attorneys’ fees and costs, and further relief as determined by the court.
On May 19, 2003, the Company’s motion to dismiss the Consolidated Class Action Complaint was denied, and discovery in that action is ongoing. By stipulation of the parties, and an order of the court entered November 10, 2003, all claims asserted in the Consolidated Class Action Complaint pursuant to Section 20A (Insider Trading) of the Securities Exchange Act against the Individual Defendants, and all remaining claims against the Individual Defendants, other than Mr. Blatt and Ms. Patrick, were dismissed without prejudice.
The Company was also named as a nominal defendant in four derivative actions, all of which named Ms. Stewart, and certain other officers and directors of the Company as defendants: In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation (the “Shareholder Derivative Litigation”), filed on December 19, 2002 in New York State Supreme Court; Beam v. Stewart, initially filed on August 15, 2002 and amended on September 6, 2002, in Delaware Chancery Court; Richards v. Stewart, filed on November 1, 2002 in Connecticut Superior Court; and Sargent v. Martinez, filed on September 29, 2003 in the U.S. District Court for the Southern District of New York. In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation consolidated three previous derivative complaints filed in New York State Supreme Court and Delaware Chancery Court: Beck v. Stewart, filed on August 13, 2002 in New York State Supreme Court, Kramer v. Stewart, filed on August 20, 2002 in New York State Supreme Court, and Alexis v. Stewart, filed on October 3, 2002 in Delaware Chancery Court. Sargent consolidated two derivative complaints previously filed in the U.S. District Court for the Southern District Court of New York: Acosta v. Stewart, filed on October 10, 2002, and Sargent v. Martinez, filed on May 30, 2003.
27
On September 30, 2003, the Company’s motion to dismiss the Beam complaint was granted in its entirety. The plaintiffs in Beam appealed the dismissal of the complaint to the Delaware Supreme Court. On March 31, 2004, the Delaware Supreme Court, sitting en banc, unanimously affirmed the dismissal of the Beam complaint. The Sargent action had previously been stayed by order of the court pending resolution of the Beam appeal by the Delaware Supreme Court. On April 22, 2004, the court lifted that stay and ordered the plaintiffs to respond to MSO’s and the MSO directors’ previously filed motions to dismiss. By order dated August 4, 2004, the Company’s motion to dismiss the Sargent complaint was granted in its entirety, and as to the issue of plaintiffs’ failure to make pre-suit demand, with prejudice. The Sargent plaintiffs’ time to appeal that dismissal has expired. The Richards action had been stayed by agreement of the parties pending resolution of the Beam appeal by the Delaware Supreme Court. By motion filed June 4, 2004, the plaintiff in the Richards action voluntarily sought an order dismissing the Richards action with prejudice, and that dismissal with prejudice was ordered by the court on June 9, 2004. Finally, by stipulation and order entered September 24, 2004, the parties to the Shareholder Derivative Litigation agreed to the dismissal of that action on the same terms as ordered by the Sargent Court in dismissing the Sargent Action.
We believe the Company has substantial defenses to the remaining Consolidated Class Action Complaint. The Company is unable to predict the outcome of that action or reasonably estimate a range of possible loss at this time.
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 |
10.1 | | Employment letter agreement between Martha Stewart Living Omnimedia, Inc. and John Cuti |
| | (incorporated by reference to the Current Report on Form 8-K filed on September 8, 2005). |
| | |
10.2 | | Consulting arrangement between Martha Stewart Living Omnimedia, Inc. and CAK Entertainment Inc. an entity for which Mr. Charles A. Koppelman, the Chairman of the Board of the Registrant, serves as Chairman and Chief Executive Officer (incorporated by reference to the Current Report on Form 8-K filed on October 21, 2005). |
| | |
31.1 | | Certification of Chief Executive Officer |
| | |
31.2 | | Certification of Chief Financial Officer |
| | |
32 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
28
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 8, 2005 | | |
| | | | | | | | |
| | | | | | /s/ James Follo | | |
| | | | | | | | |
| | | | | | | | |
| | | | Name: | | James Follo | | |
| | | | Title: | | Chief Financial and Administrative Officer | | |
29