SECURITIES AND EXCHANGE COMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 August 7, 2002
Class A, $0.01 par value 19,076,035
Class B, $0.01 par value 30,295,328
----------
Total 49,371,363
==========
1
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 12
Part II. Other Information
Item 1. Litigation 19
Item 4. Submission of matters to a vote of security holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
June 30, December 31,
2002 2001
----------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 159,927 $ 141,162
Accounts receivable, net 41,339 45,629
Inventories 11,589 12,952
Deferred television production costs 3,739 3,627
Other current assets 8,254 7,772
--------- ---------
Total current assets 224,848 211,142
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 41,644 45,423
INTANGIBLE ASSETS, net 44,257 49,340
OTHER ASSETS 7,033 5,716
--------- ---------
Total assets $ 317,782 $ 311,621
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 34,008 $ 40,649
Accrued payroll and related costs 7,518 5,988
Current portion of deferred subscription income 29,673 28,724
--------- ---------
Total current liabilities 71,199 75,361
DEFERRED SUBSCRIPTION INCOME 9,370 9,071
OTHER NONCURRENT LIABILITIES 4,511 4,997
--------- ---------
Total liabilities 85,080 89,429
--------- ---------
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares
authorized; 19,093 and 15,160 shares outstanding in 2002
and 2001, respectively 191 152
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 177,469 173,470
Retained earnings 55,514 49,009
--------- ---------
233,477 222,967
Less: Class A treasury stock at cost (775) (775)
--------- ---------
Total shareholders' equity 232,702 222,192
--------- ---------
Total liabilities and shareholders' equity $ 317,782 $ 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 Six Months Ended
June 30, June 30,
----------------------- -------------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Revenues
Publishing $ 47,323 $ 41,055 $ 90,417 $ 87,631
Television 7,249 6,899 13,960 13,343
Merchandising 15,974 8,796 27,050 16,624
Internet/Direct Commerce 8,056 11,050 15,134 20,281
-------- -------- --------- ---------
Total revenues 78,602 67,800 146,561 137,879
-------- -------- --------- ---------
Operating costs and expenses
Production, distribution and editorial 39,380 36,107 76,151 71,457
Selling and promotion 11,656 9,290 22,338 20,828
General and administrative 11,368 10,630 23,027 21,561
Depreciation and amortization 3,118 2,391 6,135 4,344
Amortization of intangible assets -- 738 -- 1,476
-------- -------- --------- ---------
Total operating costs and expenses 65,522 59,156 127,651 119,666
-------- -------- --------- ---------
Income from operations 13,080 8,644 18,910 18,213
Interest income, net 568 1,096 1,058 2,392
-------- -------- --------- ---------
Income before income taxes 13,648 9,740
19,968 20,605
Income tax provision (5,596) (4,091) (8,187) (8,655)
-------- -------- --------- ---------
Income from continuing operations
before cumulative effect of accounting
change 8,052 5,649 11,781 11,950
Loss from discontinued operations, net of
income taxes (1,313) (450) (2,139) (543)
Cumulative effect of accounting change, net
of income taxes -- -- (3,137) --
-------- -------- --------- ---------
Net income $ 6,739 $ 5,199 $ 6,505 $ 11,407
======== ======== ========= =========
Earnings per share - basic
Earnings per share from continuing
operations $ 0.16 $ 0.12 $ 0.24 $ 0.25
-------- -------- --------- ---------
Loss from discontinued operations (0.03) (0.01) (0.04) (0.01)
-------- -------- --------- ---------
Cumulative effect of accounting change -- -- (0.06) --
-------- -------- --------- ---------
Earnings per share - basic $ 0.14 $ 0.11 $ 0.13 $ 0.24
======== ======== ========= =========
4
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements (Continued)
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Earnings per share - diluted
Earnings per share from continuing
operations $ 0.16 $ 0.12 $ 0.24 $ 0.24
---------- ---------- ---------- ----------
Loss from discontinued operation (0.03) (0.01) (0.04) (0.01)
---------- ---------- ---------- ----------
Cumulative effect of accounting change -- -- (0.06) --
---------- ---------- ---------- ----------
Earnings per share - diluted $ 0.14 $ 0.11 $ 0.13 $ 0.23
========== ========== ========== ==========
Weighted average common shares
outstanding
Basic 49,166 48,608 48,968 48,562
Diluted 49,373 49,081 49,147 49,129
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Martha Stewart Living Omnimedia, Inc.
Consolidated Statement of Shareholders' Equity
For the Six Months Ended June 30, 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 -- -- -- -- -- 6,505 -- -- 6,505
Conversion of shares 3,324 33 (3,324) (33) -- -- -- -- --
Issuance of shares for stock option
exercises 609 6 -- -- 3,999 -- -- -- 4,005
------ ---- ------- ----- -------- ------- --- ----- --------
Balance at June 30, 2002 19,093 $191 30,295 $ 303 $177,469 $55,514 (59) ($775) $232,702
====== ==== ======= ===== ======== ======= === ===== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended
June 30,
-----------------------
2002 2001
--------- ---------
Cash flows from operating activities
Net income $ 6,505 $ 11,407
Adjustments to reconcile net income to net
cash provided by operating activities
Cumulative effect of accounting change 3,137
Loss from discontinued operations 721 122
Depreciation and amortization 6,135 5,820
Changes in operating assets and liabilities 1,206 (11,492)
--------- ---------
Net cash provided by operating activities 17,704 5,857
--------- ---------
Cash flows from investing activities
Acquisition of business -- (3,830)
Capital expenditures (2,944) (8,660)
--------- ---------
Net cash used in investing activities (2,944) (12,490)
--------- ---------
Cash flows from financing activities
Proceeds received from stock option exercises 4,005 2,554
--------- ---------
Net cash provided by financing activities 4,005 2,554
--------- ---------
Net increase (decrease) in cash 18,765 (4,079)
Cash and cash equivalents, beginning of period 141,162 127,425
--------- ---------
Cash and cash equivalents, end of period $ 159,927 $ 123,346
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
1. Accounting policies
a. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is
herein referred to as the "Company".
The information included in the foregoing interim condensed consolidated
financial statements is unaudited. In the opinion of management, all
adjustments which are of a normal recurring nature and necessary for a
fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be
expected for the entire year. These condensed consolidated financial
statements are unaudited and should be read in conjunction with the
audited financial statements included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission with respect
to its fiscal year ended December 31, 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. 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.
d. Reclassifications
The prior period presentation has been restated to conform with Emerging
Issues Task Force Issue 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products." These rules
require that certain expenditures of the Publishing segment related to
newsstand product placement historically presented as expenses be
reclassified and netted against revenue. In addition, the prior year
periods have been restated to reflect as discontinued operations the
results of the operations discussed in Note 5.
e. New accounting pronouncements
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 will perform its annual impairment review during the
fourth quarter of each year, commencing in the fourth quarter of 2002. The
Company completed the initial impairment tests in the second quarter of
2002 which resulted in a charge of $5,039 ($3,137 net of income taxes) to
reduce the carrying value of its goodwill related to the Internet/Direct
Commerce segment. The remaining intangible assets represent goodwill of
the Publishing segment and its fair value exceeds the carrying value.
8
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
The provisions of SFAS 142 are effective for periods after adoption and
retroactive application is not permitted. Therefore, the historical
results of periods prior to 2002 do not reflect the effect of SFAS 142.
The following comparative information represents pro forma results
assuming the adoption of SFAS 142 as of January 1, 2001:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- ----------
Net income as reported $ 6,739 $ 5,199 $ 6,505 $ 11,407
Goodwill amortization -- 435 -- 856
------- ------- ------- ----------
Adjusted Net Income $ 6,739 $ 5,634 $ 6,505 $ 12,263
======= ======= ======= ==========
Basic and diluted per share information:
Net income as reported $ 0.14 $ 0.11 $ 0.13 $ 0.23
Goodwill amortization -- .01 -- .02
------- ------- ------- ----------
Adjusted Net Income $ 0.14 $ 0.12 $ 0.13 $ 0.25
======= ======= ======= ==========
2. Inventories
The components of inventories are as follows :
June 30, December 31,
2002 2001
-------- ------------
Paper $ 3,748 $ 4,526
Product merchandise 7,841 8,426
------- -------
$11,589 $12,952
======= =======
3. Earnings per share
Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding during each period.
Diluted earnings per share include the determinants of basic earnings per
share and, in addition, give effect to dilutive potential common shares.
9
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
4. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business
segments are Publishing, Television, Merchandising and Internet/Direct
Commerce. The Publishing segment primarily consists of the Company's
magazine operations, and also those related to its book, radio, newspaper
and music operations. The Television segment consists of the Company's
television production operations that produce television programming that
airs in syndication in the United States and on cable in the United
States, Canada and certain other international markets, as well as
periodic prime time specials. The Merchandising segment consists of the
Company's operations related to the design of merchandise and related
promotional and packaging materials that are distributed by its retail and
manufacturing partners in exchange for royalty income. The Internet/Direct
Commerce segment comprises the Company's operations relating to the Martha
by Mail catalog and the website marthastewart.com.
Revenues for each segment are presented in the condensed consolidated
income statements. Income (loss) from continuing operations for each
segment were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Publishing $ 16,530 $ 15,274 $ 31,742 $ 32,621
Television 937 889 1,293 1,188
Merchandising 12,350 8,468 19,790 16,028
Internet/Direct Commerce (7,855) (6,123) (15,673) (11,924)
-------- -------- -------- --------
Total before corporate charges 21,962 18,508 37,152 37,913
Corporate charges (8,882) (9,864) (18,242) (19,700)
-------- -------- -------- --------
Income from operations $ 13,080 $ 8,644 $ 18,910 $ 18,213
======== ======== ======== ========
10
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
5. Discontinued Operations
As of June 30, 2002 the company has decided to exit certain of the
operations of The Wedding List business which is a component of the
Internet/Direct Commerce segment. The loss from exiting these operations
resulted in a write-down of fixed assets of approximately $500 and the
accrual of future lease commitments, net of anticipated sublease rental
income of $4,900, of approximately $700. These lease payments and
offsetting receipts are payable through September 2015. The total charge,
net of tax benefits of $501, is $721, and has been included with the
losses from operations during the current year periods and is reflected as
a loss from discontinued operations in the income statements.
6. Supplemental Cash Flow Information
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
------ ------ ------ -------
Cash paid for interest $ 40 $ 109 $ 99 $ 231
Cash paid for income taxes 3,597 8,170 4,229 10,400
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart
Living Omnimedia, Inc., and its subsidiaries.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 TO THREE MONTHS ENDED JUNE 30,
2001
Three Months Ended
June 30,
------------------------
2002 2001
-------- --------
(in thousands)
Revenues
Publishing $ 47,323 $ 41,055
Television 7,249 6,899
Merchandising 15,974 8,796
Internet/Direct Commerce 8,056 11,050
-------- --------
Total revenues 78,602 67,800
-------- --------
Operating costs and expenses
Production, distribution and editorial 39,380 36,107
Selling and promotion 11,656 9,290
General and administrative 11,368 10,630
Depreciation and amortization 3,118 2,391
Amortization of intangible assets -- 738
-------- --------
Total operating costs and expenses 65,522 59,156
-------- --------
Income from continuing operations 13,080 8,644
Interest income , net 568 1,096
-------- --------
Income before income taxes 13,648 9,740
Income tax provision (5,596) (4,091)
-------- --------
Net income from continuing operations 8,052 5,649
Loss from discontinued operations (1,313) (450)
-------- --------
Net Income $ 6,739 $ 5,199
======== ========
Revenues. Total revenues increased $10.8 million to $78.6 million for the three
months ended June 30, 2002, from $67.8 million for the three months ended June
30, 2001. Publishing revenues increased $6.3 million, or 15%, to $47.3 million
for the three months ended June 30, 2002, from $41.1 million for the three
months ended June 30, 2001. This increase was primarily due to an increase in
advertising revenues as a result of an increase in advertising pages sold in the
Martha Stewart Living magazine, as well as an increase in special publications
revenue of approximately $1.7 million due to the publication of two Martha
Stewart Kids magazines in the current quarter as opposed to only one in the
prior year's quarter. Television revenues increased $0.4 million, or 5%, to $7.2
million for the three months ended June 30, 2002, from $6.9 million for the
three months ended June 30, 2001. This increase was primarily due to increased
licensing income from two new cable programs of $0.5 million and increased cable
advertising revenue of $0.3 million. The increase was partially offset by
reduced syndication program revenue of $0.5 million principally due to industry
wide lower advertising rates. Merchandising revenues increased $7.2 million, or
82%, to $16.0 million for the three months ended June 30, 2002, from $8.8
million for the three months ended June 30, 2001, primarily as a result of an
increased royalty rate under our agreement with Kmart as well as additional
revenues from the sale of our Martha Stewart Everyday products sold at Kmart,
which reflected the launch of a new housewares product line. Because of a change
in the manner in which our royalty is calculated from the prior period, from
product cost basis to retail sales basis, precise quantification of the impact
of the increased royalty rate is not practicable. Kmart is currently operating
under Chapter 11 of the Federal Bankruptcy Code. During the year they have
closed 283 stores. The revenues we receive from Kmart are based upon retail
sales
12
of our products. As a result of Kmart store closings and recent Kmart sales
trends of our products we currently expect our royalties earned under our
agreement with Kmart to be at the minimum contractual amount for the full year
2002. Internet/Direct Commerce revenues decreased $3.0 million, or 27%, to $8.1
million for the three months ended June 30, 2002, from $11.1 million for the
three months ended June 30, 2001, due to lower advertising revenues of $0.2
million and lower product sales of $2.8 million. The reduced product sales
resulted principally from lower catalog circulation.
The US Attorney's office, the SEC and a subcommittee of the House Energy and
Commerce Committee are investigating the personal sale of shares owned in
another company, ImClone Systems, by Martha Stewart, our Chairman and Chief
Executive Officer. We expect to see a negative impact on the Company's business
as a result of the uncertainty surrounding these ongoing investigations,
primarily in advertising revenues and to a lesser extent revenues in our
merchandising segment. In addition, the Company is incurring additional
expenses, principally corporate communications and other professional fees,
associated with the ongoing investigation. We cannot currently predict with any
certainty the extent of the impact these investigations are likely to have on
our business due to the uncertainty of the timing and nature of their
resolution.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $3.3 million, or 9%, to $39.4 million for the three months
ended June 30, 2002, from $36.1 million for the three months ended June 30,
2001. Publishing segment costs increased $2.0 million. This increase primarily
resulted from increased costs of $0.5 million associated with the increased
number of pages printed resulting from the higher number of advertising pages
sold and increased production, distribution and editorial costs associated with
the extra Martha Stewart Kids magazine of $1.5 million. Merchandising segment
costs increased by $2.8 million principally due to the elimination of cost
reimbursements from Kmart as part of our new agreement, which commenced in
August 2001. The segment also incurred incremental expenses associated with the
development of the new Martha Stewart Signature line. Internet/Direct Commerce
expenses decreased by $1.6 million primarily due to a reduction in catalog
production and distribution costs of $1.0 million due to lower catalog
circulation and reductions in payroll costs of approximately $0.6 million.
Selling and promotion. Selling and promotion expenses increased $2.4 million, or
25%, to $11.7 million for the three months ended June 30, 2002, from $9.3
million for the three months ended June 30, 2001. Publishing segment costs
increased $2.9 million resulting primarily from increased subscription
acquisition and newsstand promotion expenses. Internet/Direct Commerce costs
decreased $0.7 million primarily from reduced marketing expenses.
General and administrative. General and administrative expenses increased $0.7
million, or 7%, to $11.4 million for the three months ended June 30, 2002, from
$10.7 million for the three months ended June 30, 2001. The higher expenses
primarily reflect the nature of the revised Kmart agreement in which certain of
our costs are no longer reimbursed.
Depreciation and amortization. Depreciation and amortization increased $0.7
million, or 30%, to $3.1 million for the three months ended June 30, 2002, from
$2.4 million for the three months ended June 30, 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, amortization expense would have been $0.7 million lower (an
impact of $.01 on an earnings per share basis.)
Under SFAS 142, goodwill is subject to an annual assessment for impairment by
applying a fair-value based test. The Company completed its initial valuations
and recorded a charge of approximately $5 million to adjust the carrying value
of goodwill. See the "cumulative effect of accounting change" discussion below.
Interest income, net. Interest income, net was $0.6 million for the three months
ended June 30, 2002, compared to $1.1 million for the three months ended June
30, 2001, due to significantly lower interest rates, slightly offset by interest
earned on higher average cash balances during the current year.
Income tax provision. Income tax provision for the three months ended June 30,
2002 was $5.6 million, representing a 41% effective income tax rate. Income tax
provision for the three months ended June 30, 2001 was $4.1 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.
13
Loss from discontinued operations. Loss from discontinued operations was $1.3
million for the three months ended June 30, 2002, compared to a loss of $0.5
million from the same operations for the three months ended June 30, 2001. The
2002 amount reflects the write-off of fixed assets of $0.5 million, the accrual
of future net lease costs of $0.7 million and losses from operations of $1.0
million, offset by tax benefits of $0.9 million.
Net income. Net income was $6.7 million for the three months ended June 30,
2002, compared to net income of $5.2 million for the three months ended June 30,
2001, as a result of the above mentioned factors.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 TO SIX MONTHS ENDED JUNE 30, 2001
Six Months Ended
June 30,
--------------------------
2002 2001
--------- ---------
(in thousands)
Revenues
Publishing $ 90,417 $ 87,631
Television 13,960 13,343
Merchandising 27,050 16,624
Internet/Direct Commerce 15,134 20,281
--------- ---------
Total revenues 146,561 137,879
--------- ---------
Operating costs and expenses
Production, distribution and editorial 76,151 71,457
Selling and promotion 22,338 20,828
General and administrative 23,027 21,561
Depreciation and amortization 6,135 4,344
Amortization of intangible assets -- 1,476
--------- ---------
Total operating costs and expenses 127,651 119,666
--------- ---------
Income from continuing operations 18,910 18,213
Interest income, net 1,058 2,392
--------- ---------
Income before income taxes 19,968 20,605
Income tax provision (8,187) (8,655)
--------- ---------
Net income from continuing operations before cumulative
effect of accounting change 11,781 11,950
Loss from discontinued operations 2,139 543
Cumulative effect of accounting change 3,137 --
--------- ---------
Net income $ 6,505 $ 11,407
========= =========
Revenues. Total revenues increased $8.7 million, or 6%, to $146.6 million for
the six months ended June 30, 2002, from $137.9 million for the six months ended
June 30, 2001. Publishing revenues increased $2.8 million, or 3%, to $90.4
million for the six months ended June 30, 2002, from $87.6 million for the six
months ended June 30, 2001. This increase was primarily due to an increase in
advertising revenues as a result of an increase in advertising pages sold in
Martha Stewart Living magazine. This increase was partially offset by reduced
revenues of $2.4 million from special publications. Television revenues
increased $0.6 million, or 5%, to $14.0 million for the six months ended June
30, 2002, from $13.3 million for the six months ended June 30, 2001. This
increase was primarily due to increased licensing income from two new cable
programs of $1.0 million, increased cable advertising revenue of $0.4 million,
and increased licensing fees from the syndicated program of $0.5 million,
partially offset by reduced syndication advertising revenue of $1.5 million due
primarily to industry wide lower advertising rates. Merchandising revenues
increased $10.4 million, or 63%, to $27.1 million for the six months ended June
30, 2002, from $16.6 million for the six months ended June 30, 2001, primarily
as a result of an increased royalty rate under
14
our agreement with Kmart as well as additional revenues received from our Martha
Stewart Everyday products sold at Kmart, which included the launch of a new
housewares product line. Because of a change in the manner in which our royalty
is calculated from the prior period, from product cost basis to retail sales
basis, precise quantification of the impact of the increased royalty rate is not
practicable. Kmart is currently operating under Chapter 11 of the Federal
Bankruptcy Code. During the year they have closed 283 stores. The revenues we
receive from Kmart are based upon retail sales of our products. As a result of
Kmart store closings and recent sales trends of our products at Kmart, we
currently expect that our royalties earned under our agreement with Kmart to be
at the minimum contractual amount for the full year 2002. Internet/Direct
Commerce revenues decreased $5.2 million, or 25%, to $15.1 million for the six
months ended June 30, 2002, from $20.3 million for the six months ended June 30,
2001, due to lower advertising revenues of $0.6 million and lower product sales
of $4.6 million. The reduced product sales resulted principally from lower
catalog circulation.
The US Attorney's office, the SEC and a subcommittee of the House Energy and
Commerce Committee are investigating the personal sale of shares owned in
another company, ImClone Systems, by Martha Stewart, our Chairman and Chief
Executive Officer. We expect to see a negative impact on the Company's business
as a result of the uncertainty surrounding these ongoing investigations,
primarily in advertising revenues and to a lesser extent revenues in our
merchandising segment. In addition, the Company is incurring additional
expenses, principally corporate communications and professional fees associated
with the ongoing investigations. We cannot currently predict with any certainty
the extent of the impact these investigations are likely to have on our business
due to the uncertainty of the timing and nature of their resolution.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $4.7 million, or 7%, to $76.2 million for the six months
ended June 30, 2002, from $71.5 million for the six months ended June 30, 2001.
Publishing segment costs increased $0.7 million reflecting higher postage and
printing costs, offset by lower paper costs. Merchandising segment costs
increased by $5.3 million principally due to the elimination of cost
reimbursements from Kmart as part of our new agreement, which commenced in
August 2001. The segment also incurred incremental expenses associated with the
development of the new Martha Stewart Signature line. Internet/Direct Commerce
costs decreased $1.5 million due primarily to lower catalog production and
distribution costs of $1.2 million due to lower catalog circulation, and
reductions in payroll costs of approximately $0.5 million.
Selling and promotion. Selling and promotion expenses increased $1.5 million, or
7%, to $22.3 million for the six months ended June 30, 2002, from $20.8 million
for the six months ended June 30, 2001. Publishing segment costs increased $2.8
million resulting from increased subscription acquisition and newsstand
promotion expenses. Internet /Direct Commerce cost decreased $1.5 million
primarily due to decreased marketing expenses.
General and administrative. General and administrative expenses increased $1.5
million, or 7%, to $23.0 million for the six months ended June 30, 2002, from
$21.6 million for the six months ended June 30, 2001. The higher expenses
primarily reflect the nature of the revised Kmart agreement in which certain of
our costs are no longer reimbursed.
Depreciation and amortization. Depreciation and amortization increased $1.8
million, or 41%, to $6.1 million for the six months ended June 30, 2002, from
$4.3 million for the six months ended June 30, 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, amortization expenses would have been $1.4 million lower (an
impact of $.02 on an earning per share basis.)
Interest income, net. Interest income, net was $1.1 million for the six months
ended June 30, 2002, compared to $2.4 million for the six months ended June 30,
2001, due to significantly lower interest rates slightly offset by interest
earned on higher average cash balances during the current year.
Income tax provision. Income tax provision for the six months ended June 30,
2002 was $8.2 million, representing a 41% effective income tax rate. Income tax
provision for the six months ended June 30, 2002 was $8.7 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.
Loss from Discontinued Operations. Loss from discontinued operations was $2.1
million for the six months ended June 30, 2002, compared to $0.5 million from
the same operations for the six months ended June 30, 2001. The
15
2002 amount reflects the write-offs of fixed assets of $0.5 million, the accrual
of future net lease costs of $0.7 million and losses from operations of $2.4
million offset by tax benefits of $1.5 million.
Cumulative Effect of Accounting Change. Effective 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 will be performing its annual impairment review during the
fourth quarter of each year commencing in the fourth quarter of 2002. The
Company completed the initial impairment tests in the second quarter of 2002
which resulted in a charge of approximately $5 million ($3.1 million after
taxes) to reduce the carrying value of its goodwill related to the
Internet/Direct Commerce segment. The remaining intangible assets represent
goodwill of the Publishing segment and its fair value exceeds the carrying
value. The Company does not expect to incur any additional charges when it
performs the fourth quarter evaluation.
Net income. Net income was $6.5 million for the six months ended June 30, 2002,
compared to net income of $11.4 million for the six months ended June 30, 2001,
as a result of the above mentioned factors.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $159.9 million at June 30, 2002, compared to
$141.2 million at December 31, 2001.
Cash flows from operating activities were $17.7 and $5.9 million during the six
months ended June 30, 2002, and 2001, respectively, resulting primarily from net
earnings in the periods increased by non-cash charges for depreciation, the
write-off of goodwill and accrued losses related to discontinued operations. In
2001, these cash flows were impacted by payments for accounts payable and
accrued liabilities primarily as a result of payments for our new office
facility, our internet technology upgrade project and the timing of vendor
payments for product purchases.
Cash flows used in investing activities were $2.9 million for the six months
ended June 30, 2002, representing capital expenditures. Cash flows used in
investing activities were $12.5 million during the six months ended June 30,
2001, reflecting a $3.8 million net asset purchase of The Wedding List, and $8.7
million of capital expenditures, primarily for our internet technology upgrade
project.
Cash flows provided by financing activities for the six month periods ended June
30, 2002 and 2001 were $4.0 and $2.6 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 $10.0 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of June 30, 2002, we had no outstanding borrowings under
this facility.
During the year ending 2002, we expect revenues from Kmart to exceed 10% of the
Company's total revenues. Receivables for royalties are accrued on a monthly
basis and payment is made by Kmart on a quarterly basis. The company continues
to expect to be paid on its quarterly schedule and has made no provision for any
deviation as a result of Kmart's bankruptcy proceedings.
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 have historically been 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
MSO's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company 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, MSO evaluates its estimates,
including those related to bad debts, inventories, long lived assets and accrued
losses. The Company bases its estimates on historical experience and on various
other assumptions that are believed 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.
17
We believe that of our significant accounting policies, the following may
involve the highest degree of judgment and complexity.
Bad Debt
MSO maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of its customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Receivables for royalties in our merchandising business are accrued on a monthly
basis and payment is made by our strategic partners on a quarterly basis. With
respect to Kmart, the Company continues to expect to be paid on its quarterly
schedule and has made no provision for any deviation as a result of Kmart's
bankruptcy proceedings.
Long Lived Assets
The company reviews the carrying values of its 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 the company's assets and result in an impairment charge.
18
PART II: OTHER INFORMATION
ITEM 1. LITIGATION
The Company and Stewart are named as defendants in Semon v. Martha Stewart
Living Omnimedia, Inc., filed in federal court for the Southern District of New
York on August 6, 2002 on behalf of persons who acquired the Company stock on
the open market from June 7, 2002 to August 5, 2002, excluding certain parties
affiliated with the Company. The suit asserts violations of Section 10(b) of the
Securities Exchange Act of 1934, and rules promulgated thereunder, and relates
to Stewart's sale of 3,928 shares of ImClone stock on December 27, 2001. The
plaintiff alleges that Stewart, both directly and through representatives
speaking for herself and in her capacity as chief executive officer of the
Company, made statements about the sale that were materially false and
misleading. The plaintiff alleges that as a result of these violations, the
market price of the Company stock was inflated during the putative class period
and dropped after the alleged falsity of Stewart's statements became public. The
complaint seeks certification of the case as a class action, with plaintiff as
lead plaintiff and plaintiff's counsel as lead counsel; damages; attorney's fees
and costs; and further relief as determined by the court. The litigation is in
its earliest stages, and the Company has not yet appeared in the action or filed
any response to the complaint. The Company believes it has substantial defenses
to the complaint and intends to defend this litigation vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our 2002 Annual Meeting of Stockholders on May 9, 2002.
(b) The following matters were acted upon at the meeting by holders of Class A
Common Stock and Class B Common Stock voting as one class with the following
results:
1. The election of directors to hold office until our next annual meeting. The
vote on this matter was as follows:
BROKER
FOR VOTE WITHHELD NON-VOTES
----------- ------------- ---------
Arthur C. Martinez 320,412,346 71,079 0
Darla D. Moore 320,399,281 84,144 0
Sharon L. Patrick 320,416,793 66,632 0
Naomi O. Seligman 320,418,288 65,137 0
Martha Stewart 320,158,888 324,537 0
Jeffrey W. Ubben 320,418,278 65,147 0
2. Approval of the Martha Stewart Living Omnimedia, Inc. 2002 Performance-Based
Executive Bonus Plan. The vote on this matter was as follows:
19
VOTES BROKER
FOR AGAINST ABSTAINING NON-VOTES
--- ------- ---------- ---------
315,446,781 411,684 622,348 4,002,612
3. Approval of the 1999 Stock Incentive Plan. The vote on this matter was as
follows:
VOTES BROKER
FOR AGAINST ABSTAINING NON-VOTES
--- ------- ---------- ---------
315,122,041 735,699 623,073 4,002,612
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, prolonged negative
publicity relating to Martha Stewart; a loss of the services, or diminution in
the reputation, of Martha Stewart; the effect on the Company of the ongoing
governmental investigations concerning a sale of non-Company stock by Martha
Stewart, the related uncertainty, and any adverse outcome of such
investigations; downturns in national and/or local economies; 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; 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 product introductions; 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
------ -------------
99.3 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)
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on May 8, 2002, which was
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: August 14, 2002 By: /s/ James Follo
--------------------------------------
Name: James Follo
Title: Executive Vice President,
Chief Financial Officer
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
99.3 -- 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)
22