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, 2002
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 April 23, 2002
Class A, $0.01 par value 18,862,963
Class B, $0.01 par value 30,295,328
----------
Total 49,158,291
==========
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
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, December 31,
2002 2001
---------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 143,838 $ 141,162
Accounts receivable, net 39,484 45,629
Inventories 13,945 12,952
Deferred television production costs 3,660 3,627
Other current assets 7,121 7,772
---------- ----------
Total current assets 208,048 211,142
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net 44,301 45,423
---------- ----------
INTANGIBLE ASSETS, net 49,215 49,340
---------- ----------
OTHER ASSETS 6,857 5,716
---------- ----------
Total assets $ 308,421 $ 311,621
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 31,466 $ 40,649
Accrued payroll and related costs 3,933 5,988
Current portion of deferred subscription income 33,528 28,724
---------- ----------
Total current liabilities 68,927 75,361
DEFERRED SUBSCRIPTION INCOME 7,864 9,071
OTHER NONCURRENT LIABILITIES 4,884 4,997
---------- ----------
Total liabilities 81,675 89,429
---------- ----------
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares
authorized; 18,878 and 15,160 shares issued in 2002
and 2001, respectively 188 152
Class B common stock, $.01 par value, 150,000 shares
authorized; 30,295 and 33,619 outstanding in 2002 and 2001,
respectively 303 336
Capital in excess of par value 175,117 173,470
Retained earnings 51,913 49,009
Less Class A treasury stock - 59 shares at cost (775) (775)
---------- ----------
Total shareholders' equity 226,746 222,192
---------- ----------
Total liabilities and shareholders' equity $ 308,421 $ 311,621
========== ==========
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
March 31,
---------------------------
2002 2001
-------- --------
Revenues
Publishing $ 43,095 $ 46,577
Television 6,711 6,443
Merchandising 11,075 7,828
Internet/Direct Commerce 7,819 9,501
-------- --------
Total revenues 68,700 70,349
-------- --------
Operating costs and expenses
Production, distribution and editorial 38,237 35,755
Selling and promotion 11,319 11,538
General and administrative 11,657 10,932
Depreciation and amortization 3,055 1,978
Amortization of intangible assets --- 738
-------- --------
Total operating costs and expenses 64,268 60,941
-------- --------
Income from operations 4,432 9,408
Interest income, net 490 1,295
-------- --------
Income before income taxes 4,922 10,703
Income tax provision (2,018) (4,495)
-------- --------
Net income $ 2,904 $ 6,208
======== ========
Basic earnings per share $ 0.06 $ 0.13
-------- --------
Basic average shares outstanding 48,945 48,516
-------- --------
Diluted earnings per share $ 0.06 $ 0.13
-------- --------
Diluted average shares outstanding 49,097 49,176
-------- --------
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 Three Months Ended March 31, 2002
(unaudited, in thousands)
Class A Class B Capital in Class A
common stock common stock Excess of par Retained treasury stock
Shares Amount Shares Amount value earnings Shares Amount Total
------ ------ ------ ------ ------------- -------- ------ ------ --------
Balance at January 1, 2002 15,160 $ 152 33,619 $ 336 $173,470 $ 49,009 (59) $ (775) $222,192
Net income for the period -- -- -- -- -- 2,904 -- -- 2,904
Conversion of shares 3,324 33 (3,324) (33) -- -- -- -- --
Issuance of shares for stock option
exercises 394 3 -- -- 1,647 -- -- -- 1,650
------ ------ ------ ------ -------- -------- ------ ------ --------
Balance at March 31, 2002 18,878 $ 188 30,295 $ 303 $175,117 $ 51,913 (59) $ (775) $226,746
====== ====== ====== ====== ======== ======== ====== ====== ========
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)
Three Months Ended
March 31,
-------------------------
2002 2001
--------- ---------
Cash flows from operating activities
Net income $ 2,904 $ 6,208
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 3,055 2,716
Changes in operating assets and liabilities, net of
assets acquired (3,000) (17,985)
--------- ---------
Net cash provided by (used in) operating activities 2,956 (9,061)
--------- ---------
Cash flows from investing activities
Acquisition of business -- (3,824)
Capital expenditures (1,933) (3,805)
--------- ---------
Net cash used in investing activities (1,933) (7,629)
--------- ---------
Cash flows from financing activities
Issuance of note payable -- 2,000
Proceeds received from stock option exercises 1,650 1,221
--------- ---------
Net cash provided by financing activities 1,650 3,221
--------- ---------
Net increase (decrease) in cash 2,676 (13,469)
Cash and cash equivalents, beginning of period 141,162 127,425
--------- ---------
Cash and cash equivalents, end of period $ 143,838 $ 113,956
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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,
2001.
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
Commencing January 1, 2002, the Company Adopted Statement of Financial
Accounting Standards No. 142, "Accounting for Goodwill and Other
Intangible Assets". Under SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is
subject to an annual assessment for impairment by applying a fair-value
based test. The Company is in the process of finalizing its initial
valuations and expects that it will record a charge in the range of $5
to $6 million to adjust the carrying value of goodwill upon the
completion of the evaluation.
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.
e. Reclassifications
The prior period presentation has been restated to conform with
Emerging Issues Task Force Issue 01-09. These rules require that
certain expenses historically presented as expenses be reclassified and
netted against revenue.
7
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 December 31,
31, 2002 2001
-------- ------------
Paper $ 5,846 $ 4,526
Product merchandise 8,099 8,426
------- -------
$13,945 $12,952
======= =======
3. 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,
and licensing of certain of the Company's trademarks in connection
with, 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 is as
follows:
Three Months Ended
March 31,
-----------------------
2002 2001
-------- --------
Publishing $ 15,213 $ 17,349
Television 355 299
Merchandising 7,440 7,560
Internet/Direct Commerce (9,217) (5,963)
-------- --------
Total before corporate charges 13,791 19,245
Corporate (9,359) (9,837)
-------- --------
Income from operations $ 4,432 $ 9,408
======== ========
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Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
4. Supplemental Cash Flow Information
Three Months Ended
March 31,
------------------
2002 2001
------ ------
Cash paid for interest $ 59 $ 122
Cash paid for income taxes 633 2,230
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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, 2002 TO THREE MONTHS ENDED MARCH 31,
2001
Three Months Ended
March 31,
2002 2001
-------- --------
(in thousands, except
per share amounts)
Revenues
Publishing $ 43,095 $ 46,577
Television 6,711 6,443
Merchandising 11,075 7,828
Internet/Direct Commerce 7,819 9,501
-------- --------
Total revenues 68,700 70,349
-------- --------
Operating costs and expenses
Production, distribution and editorial 38,237 35,755
Selling and promotion 11,319 11,538
General and administrative 11,657 10,932
Depreciation and amortization 3,055 1,978
Amortization of intangible assets -- 738
-------- --------
Total operating costs and expenses 64,268 60,941
-------- --------
Income from operations 4,432 9,408
-------- --------
Interest income, net 490 1,295
-------- --------
Income before income taxes 4,922 10,703
-------- --------
Income tax provision (2,018) (4,495)
-------- --------
Net income $ 2,904 $ 6,208
======== ========
Earnings per share- basic $ 0.06 $ 0.13
======== ========
Earnings per share- diluted $ 0.06 $ 0.13
======== ========
Revenues. Total revenues decreased $1.6 million, or 2.3%, to $68.7 million for
the three months ended March 31, 2002, from $70.3 million for the three months
ended March 31, 2001. Publishing revenues decreased $3.5 million, or 7.5%, to
$43.1 million for the three months ended March 31, 2002, from $46.6 million for
the three months ended March 31, 2001. This decrease was primarily due to the
impact of publishing one less special issue in the quarter, which was partially
offset by higher advertising revenues resulting from an advertising rate
increase. Television revenues increased $0.3 million, or 4.2%, to $6.7 million
for the three months ended March 31, 2002, from $6.4 million for the three
months ended March 31, 2001. The increase is due primarily to revenues earned on
two new cable programs, which was partially offset by an industry-wide decline
in advertising rates. Merchandising revenues increased $3.3 million, or 41.5%,
to $11.1 million for the three months ended March 31, 2002, from $7.8 million
for the three months ended March 31, 2001, primarily as a result of an increased
royalty rate under our agreement with Kmart, and revenue from the successful
launches of the new Martha Stewart Everyday Keeping and Martha Stewart Everyday
Decorating product lines at Kmart. Internet/Direct Commerce revenues decreased
$1.7 million, or 17.7%, to $7.8 million for the three months ended March 31,
2002, from $9.5 million for the three months ended March 31, 2001, due to lower
advertising revenues of $.4 million and the impact of lower catalog circulation.
Product revenues were also negatively impacted from the relocation of our
fulfillment center to a new center.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $2.5 million, or 7.0%, to $38.2 million for the three months
ended March 31, 2002, from $35.8 million for the three months ended March 31,
2001. Merchandising segment costs increased by $2.5 million due to the
10
elimination of cost reimbursements from Kmart as part of our new agreement,
which commenced in August 2001. Publishing segment costs decreased $1.3 million
primarily from the impact of a reduction in paper and printing costs associated
with publishing one less special issue in the quarter. Internet/Direct Commerce
segment costs increased $1.2 million primarily due to costs associated with the
acquired Wedding List business. The segments costs also were negatively impacted
by approximately $1.3 million attributable to moving our call and fulfillment
center and employee costs associated with staff reductions during the quarter.
Selling and promotion. Selling and promotion expenses decreased $0.2 million, or
2.0%, to $11.3 million for the three months ended March 31, 2002, from $11.5
million for the three months ended March 31, 2001. Publishing segment costs
decreased $0.1 million resulting primarily from lower circulation costs
associated with publishing one less special issue in the quarter.
Internet/Direct Commerce segment costs decreased $0.1 million resulting from
lower promotional spending, partially offset by costs from the acquired Wedding
List business.
General and administrative. General and administrative expenses increased $0.7
million, or 6.6%, to $11.7 million for the three months ended March 31, 2002,
from $10.9 million for the three months ended March 31, 2001. The higher
expenses primarily reflect the nature of the revised Kmart Agreement in which
certain costs are no longer reimbursed.
Depreciation and amortization. Depreciation and amortization increased $0.4
million, or 12.5%, to $3.1 million for the three months ended March 31, 2002,
from $2.7 million for the three months ended March 31, 2001. The increase is
primarily due to increased depreciation of our new website which we launched in
November 2001. Furthermore, in the current year we have adopted the new SFAS 142
accounting rules. Accordingly, there is no expense in the current period for the
amortization of goodwill. If this standard had been in effect for the prior
year's period, the impact would have been to reduce amortization expense by $.7
million ($.01 per share).
Under SFAS 142, goodwill is subject to annual assessment for impairment by
applying a fair-value based test. The Company is in the process of finalizing
its initial valuations and expects that it will record a charge in the range of
$5 to $6 million to adjust the carrying value of goodwill upon the completion of
the evaluation.
Interest income, net. Interest income, net was $0.5 million for the three months
ended March 31, 2002, compared to $1.3 million for the three months ended March
31, 2001, due to significantly lower interest rates which more than offset
increased average cash balances during the 2002 quarter.
Income tax provision. Income tax provision for the three months ended March 31,
2002 was $2.0 million, representing a 41% effective income tax rate. Income tax
provision for the three months ended March 31, 2001 was $4.5 million,
representing a 42% effective income tax rate. The lower rate in 2002 is due
primarily to the effect of reduced non-deductible amortization of intangibles
offset by reduced tax benefits from tax-free interest income.
Net income. Net income was $2.9 million for the three months ended March 31,
2002, compared to net income of $6.2 million for the three months ended March
31, 2001, as a result of the above mentioned factors.
Earnings per share. Basic and diluted earnings per share were $0.06 per share
for the three months ended March 31, 2002, compared to $0.13 for the three
months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $143.8 million at March 31, 2002, compared to
$141.2 million at December 31, 2001.
Cash flows from operating activities were $3.0 million during the three months
ended March 31, 2002, resulting primarily from net income for the quarter. Cash
flows used in operating activities were $9.1 million during the three months
ended March 31, 2001 resulting primarily from net income which was more than
completely offset by payments for accounts payable and accrued liabilities.
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Cash flows used in investing activities were $1.9 million for the three months
ended March 31, 2002, reflecting $1.9 million of capital expenditures, primarily
for an internet technology project. Cash flows used in investing activities were
$7.6 million during the three months ended March 31, 2001, reflecting a $3.8
million investment in The Wedding List and capital expenditures of $3.8 million.
Cash flows provided by financing activities for the three months ended March 31,
2002 were $1.7 million, representing proceeds received from the exercise of
employee stock options. Cash flows provided by financing activities were $3.2
million during the three months ended March 31, 2001, 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.
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, 2002, we had no outstanding borrowings under
this facility.
We believe that our available cash balances, together with any cash generated
from operations and any funds available under existing credit facilities will be
sufficient to meet our operating and recurring cash needs for foreseeable
periods.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, Martha Stewart Weddings is published four times annually: one issue
in each of the second and third quarters and two issues in the fourth quarter.
Additionally, the publication schedule of special issue magazines can vary from
quarter to quarter. Revenue and income from operations for the Television
segment tend to be higher in the fourth quarter due to the broadcast of a
holiday prime-time television special. Internet/Direct Commerce revenues also
tend to be higher in the fourth quarter due to increased consumer spending
during that period. Revenues from the Merchandising segment can vary from
quarter to quarter due to new product launches and the seasonality of certain
product lines.
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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; shifts in our own business strategies; 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;
unanticipated increases in paper, postage or printing costs; technological
developments affecting products or methods of distribution such as the Internet
or e-commerce; operational or financial problems at any of our contractual
business partners; the receptivity of consumers to our new product
introductions; unexpected developments in Kmart Corporation's Chapter 11
proceedings; and changes in government regulations affecting our industries.
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
The following exhibit is filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------- ---------------------
99.2 Letter of Martha Stewart Living Omnimedia, Inc., dated
May 3, 2002, addressed to the Securities and Exchange
Commission, regarding representations to Martha Stewart
Living Omnimedia, Inc. from Arthur Andersen LLP.
(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.
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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 3, 2002 By: /s/ James Follo
----------------------------------------------------
Name: James Follo
Title: Executive Vice President, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
14