UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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.
Class Outstanding at May 7, 2003
Class A, $0.01 par value 19,401,142
Class B, $0.01 par value 30,058,975
----------
Total 49,460,117
==========
-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 10
Item 4. Controls and Procedures 15
Part II Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19
-2-
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 119,257 $ 131,664
Short-term investments 47,286 47,286
Accounts receivable,net 27,754 37,796
Inventories, net 9,211 8,654
Deferred television production costs 4,296 4,179
Income taxes receivable 3,331 --
Deferred income taxes 7,028 7,028
Other current assets 4,373 4,756
--------- ---------
TOTAL CURRENT ASSETS 222,536 241,363
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 29,466 31,288
--------- ---------
INTANGIBLE ASSETS, net 44,257 44,257
--------- ---------
DEFERRED INCOME TAXES 2,827 2,827
--------- ---------
OTHER NONCURRENT ASSETS 4,500 4,807
--------- ---------
TOTAL ASSETS $ 303,586 $ 324,542
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 30,446 $ 40,517
Accrued payroll and related costs 2,607 9,385
Income taxes payable -- 323
Current portion of deferred subscription income 25,657 24,932
--------- ---------
TOTAL CURRENT LIABILITIES 58,710 75,157
--------- ---------
DEFERRED SUBSCRIPTION INCOME 7,939 7,715
OTHER NONCURRENT LIABILITIES 4,676 5,035
--------- ---------
TOTAL LIABILITIES 71,325 87,907
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares
authorized: 19,347 and 19,342 shares issued in 2003
and 2002, respectively 194 194
Class B common stock, $.01 par value, 150,000 shares
authorized: 30,059 and 30,295 shares outstanding
in 2003 and 2002, respectively 301 303
Capital in excess of par value 181,541 181,629
Unamortized restricted stock (768) (993)
Retained earnings 51,768 56,277
--------- ---------
233,036 237,410
Less Class A treasury stock - 59 shares at cost (775) (775)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 232,261 236,635
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 303,586 $ 324,542
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited, in thousands except per share data)
2003 2002
---- ----
REVENUES
Publishing $ 34,060 $ 43,095
Television 6,615 6,711
Merchandising 10,328 11,075
Internet/Direct Commerce 7,019 7,078
-------- --------
TOTAL REVENUES 58,022 67,959
-------- --------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 35,625 36,771
Selling and promotion 12,821 10,682
General and administrative 14,974 11,658
Depreciation and amortization 2,141 3,017
-------- --------
TOTAL OPERATING COSTS AND EXPENSES 65,561 62,128
-------- --------
OPERATING INCOME (LOSS) (7,539) 5,831
Interest income, net 402 490
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (7,137) 6,321
Income tax benefit (provision) 2,849 (2,593)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS FROM
DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (4,288) 3,728
-------- --------
Loss from discontinued operations, net of tax benefit (221) (825)
-------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (4,509) 2,903
Cumulative effect of accounting change, net of tax benefit -- (3,137)
-------- --------
NET LOSS $ (4,509) $ (234)
======== ========
LOSS PER SHARE - BASIC AND DILUTED
Income (loss) from continuing operations $ (0.09) $ 0.08
Loss from discontinued operations 0.00 (0.02)
Cumulative effect of accounting change -- (0.06)
-------- --------
Net loss $ (0.09) $ 0.00
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
Basic 49,631 48,945
-------- --------
Diluted 49,631 49,097
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2003
(unaudited, in thousands)
CLASS A CLASS B CAPITAL IN UNAMORTIZED
COMMON STOCK COMMON STOCK EXCESS OF RESTRICTED
---------------- ----------------
SHARES AMOUNT SHARES AMOUNT PAR VALUE STOCK
------ ------ ------ ------ --------- -----
Balance at January 1, 2003 19,342 $194 30,295 $ 303 $ 181,629 $ (993)
Net loss for the period -- -- -- -- -- --
Issuance of shares for stock
option exercises 5 -- -- -- 12 --
Shares returned on net treasury
basis -- -- (236) (2) 2 --
Return of restricted stock -- -- -- -- (102) $ 102
Amortization of restricted stock -- -- -- -- -- 123
------ ---- ------ ----- --------- -------
Balance at March 31, 2003 19,347 $194 30,059 $ 301 $ 181,541 $ (768)
====== ==== ====== ===== ========= =======
CLASS A
RETAINED TREASURY STOCK
-------------------
EARNINGS SHARES AMOUNT TOTAL
-------- ------ ------ -----
Balance at January 1, 2003 $ 56,277 (59) $ (775) $ 236,635
Net loss for the period (4,509) -- -- (4,509)
Issuance of shares for stock
option exercises -- -- -- 12
Shares returned on net treasury
basis -- -- -- --
Return of restricted stock -- -- -- --
Amortization of restricted stock -- -- -- 123
-------- --- ------- ---------
Balance at March 31, 2003 $ 51,768 (59) $ (775) $ 232,261
======== === ======= =========
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
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited, in thousands)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,509) $ (234)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change -- 3,137
Depreciation and amortization 2,141 3,055
Amortization of restricted stock 123 --
Changes in operating assets and liabilities (9,856) (2,999)
--------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (12,101) 2,959
--------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (318) (1,933)
Purchases of short-term investments -- (17,199)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (318) (19,132)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 12 1,650
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12 1,650
--------- --------
NET DECREASE IN CASH (12,407) (14,523)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 131,664 68,076
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 119,257 $ 53,553
========= ========
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, 2002.
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 year periods have been restated to reflect as discontinued operations
the results of the operations discussed in Note 5.
e. Intangible assets
Commencing January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangible Assets". Under SFAS No. 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 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 Wedding List. In accordance with
the SFAS 142 transition rules, we have presented these amounts in the first
quarter of 2002. The remaining intangible assets represent goodwill of the
Publishing segment and its fair value exceeds the carrying value.
-7-
f. Stock Compensation
As permitted by Statement of Financial Accounting Standards ("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 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. The fair value of options granted were estimated
on the grant date using the Black-Scholes option pricing model, using the
following assumptions for the three month periods ended March 31, :
2003 2002
---- ----
risk-free interest rates 3.39% 4.73%
dividend yields zero zero
expected volatility 134% 134%
expected option life 6 years 6 years
average fair market value per option
granted $8.96 $14.57
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 effect on net loss for the three months ended March 31, 2003 and 2002 were
as follows:
2003 2002
---- ----
Net loss, as reported $(4,509) $ (234)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 2,568 2,286
------- -------
Pro forma net loss $(7,077) $(2,520)
======= =======
Loss per share:
Basic and diluted - as reported $ (0.09) $ (0.00)
Basic and diluted - pro forma $ (0.14) $ (0.05)
2. Inventories
The components of inventories are as follows:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Paper $ 5,212 $ 4,861
Product merchandise 8,563 8,887
------- -------
13,775 13,748
Less: reserve for obsolete and excess
inventory 4,564 5,094
------- -------
$ 9,211 $ 8,654
======= =======
3. Earnings (loss) per share
Earnings (loss) per share are computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings (loss) per share are calculated by dividing
net income (loss) by the weighted-average number of common shares outstanding
during each period. Diluted earnings (loss) per share include the determinants
of basic earnings (loss) per share and, in addition, give effect to potentially
dilutive common shares. In the first quarter of 2003 there were no potentially
dilutive common shares included in the calculation of diluted earnings per
share, as their inclusion would be antidilutive.
-8-
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. 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 its catalog, Martha Stewart: The Catalog For Living, and
the website marthastewart.com.
Revenues for each segment are presented in the condensed consolidated statements
of income. Income (loss) from operations for each segment were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
Publishing $ 4,972 $ 15,212
Television 227 355
Merchandising 7,035 7,441
Internet/Direct Commerce (8,252) (7,384)
-------- --------
Total before corporate charges 3,982 15,624
Corporate charges (11,521) (9,793)
-------- --------
Income (loss) from continuing operations $ (7,539) $ 5,831
======== ========
5. 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. All prior period financial statements were restated to report the
operations as a discontinued operation.
Total revenue for The Wedding List for the three months ended March 31, 2003 and
2002 was $0.6 million and $0.7 million, respectively. The operating loss before
income tax benefit for the three months ended March 31, 2003 and 2002 was $0.3
million and $1.3 million, respectively.
6. Supplemental cash flow information:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------ -----
Cash paid for interest $ 13 $ 59
Cash paid for income taxes 1,529 633
-9-
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, 2003 TO THREE MONTHS ENDED MARCH 31,
2002
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
REVENUES
Publishing $ 34,060 $ 43,095
Television 6,615 6,711
Merchandising 10,328 11,075
Internet/Direct Commerce 7,019 7,078
-------- --------
TOTAL REVENUES 58,022 67,959
-------- --------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 35,625 36,771
Selling and promotion 12,821 10,682
General and administrative 14,974 11,658
Depreciation and amortization 2,141 3,017
-------- --------
TOTAL OPERATING COSTS AND EXPENSES 65,561 62,128
-------- --------
OPERATING INCOME (LOSS) (7,539) 5,831
Interest income, net 402 490
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (7,137) 6,321
Income tax benefit (provision) 2,849 (2,593)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS FROM
DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (4,288) 3,728
-------- --------
Loss from discontinued operations, net of tax benefit (221) (825)
-------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (4,509) 2,903
Cumulative effect of accounting change, net of tax benefit -- (3,137)
-------- --------
NET LOSS $ (4,509) $ (234)
======== ========
Revenues. Total revenues decreased $9.9 million, or 14.6%, to $58.0 million for
the quarter ended March 31, 2003, from $68.0 million for the quarter ended March
31, 2002. Publishing revenues decreased $9.0 million, or 21.0%, to $34.1 million
for the quarter ended March 31, 2003, from $43.1 million for the quarter ended
March 31, 2002. This decrease was primarily due to lower advertising revenues of
$6.6 million, lower circulation revenues of $1.7 million and decreased revenues
from our book business of $0.6 million. The decrease in advertising revenues
resulted from lower advertising revenues in Martha Stewart Living magazine of
$9.2 million as a result of fewer advertising pages and lower advertising rates,
partially offset by increased advertising revenues of $2.6 million in our
special interest publications consisting of $3.5 million of advertising revenues
related to two issues of a new test publication, Everyday Food, partially offset
by lower advertising pages and rates in other special interest publications.
-10-
The decrease in circulation revenues primarily resulted from lower newsstand and
subscription revenues of $2.9 million from Martha Stewart Living magazine,
partially offset by circulation revenues of $1.0 million from Everyday Food
magazine. During the first quarter of 2003, the Company published three issues
of Martha Stewart Living magazine (compared to three issues in the prior year's
quarter), two issues of Everyday Food (compared to no issues in the prior year's
quarter), one issue of Martha Stewart Baby (compared to one issue in the prior
year's quarter) and one issue of Martha Stewart Kids (compared to no issue in
the prior year's quarter). Television revenues decreased $0.1 million, or 1.4%,
to $6.6 million for the quarter ended March 31, 2003, from $6.7 million for the
quarter ended March 31, 2002. The decrease is due to a variety of factors,
partially offset by higher cable revenues of $0.3 million due to additional
cable television programming. Merchandising revenues decreased $0.8 million, or
6.7%, to $10.3 million for the quarter ended March 31, 2003, from $11.1 million
for the quarter ended March 31, 2002, primarily as a result of lower royalties
earned on sales of Martha Stewart Everyday branded products of $1.8 million due
to store closings and same- store- sales declines at Kmart. The decrease was
partially offset by the impact of a higher royalty rate under our agreement with
Kmart of $0.7 million and higher royalties earned from sales of Martha Stewart
Signature products of $0.7 million. Kmart recently emerged from bankruptcy.
While operating under Chapter 11 of the Federal Bankruptcy Code, Kmart closed
283 stores in 2002 and announced in January 2003 the closing of an additional
326 stores. The Company has recognized royalty revenues earned under our
agreement with Kmart based upon actual royalties earned, not contractual minimum
amounts. Contractual minimum amounts under our agreement with Kmart are computed
on January 31st annually each year and paid shortly thereafter. The Company
currently expects earned royalties, which are paid quarterly, to be below the
annual minimum amount. We expect to recognize the difference between the minimum
royalty amount and royalties paid on actual sales in the fourth quarter of 2003,
when the amount can be determined. Internet/Direct Commerce revenues decreased
$0.1 million, or 0.8%, to $7.0 million for the quarter ended March 31, 2003,
from $7.1 million for the quarter ended March 31, 2002, due primarily to lower
advertising revenues of $0.5 million, partially offset by higher product sales
of $0.4 million resulting principally from higher catalog circulation, partially
offset by lower catalog response rates and web traffic.
Production, distribution and editorial. Production, distribution and editorial
expenses decreased $1.1 million, or 3.1%, to $35.6 million for the quarter ended
March 31, 2003, from $36.8 million for the quarter ended March 31, 2002.
Publishing segment costs decreased $0.5 million reflecting lower paper, printing
and distribution costs of Martha Stewart Living magazine primarily due to lower
number of pages printed per issue, partially offset by higher costs associated
with the increased frequency of interest publications. Television production and
distribution costs decreased $0.3 million due to a variety of factors.
Merchandising costs decreased $0.4 million, due to lower costs related to design
projects. Internet/Direct Commerce costs were unchanged from the prior year's
quarter, with higher catalog circulation and distribution costs of $1.6 million
being offset by lower fulfillment and content costs.
Selling and promotion. Selling and promotion expenses increased $2.1 million, or
20.0%, to $12.8 million for the quarter ended March 31, 2003, from $10.7 million
for the quarter ended March 31, 2002. Publishing segment costs increased $1.5
million, or 14.4%, resulting primarily from circulation acquisition costs
relating to Everyday Food. Television segment costs increased $0.3 million,
resulting primarily from higher marketing and promotion expenses related to the
syndicated program.
General and administrative. General and administrative expenses increased $3.3
million, or 28.4%, to $15.0 million for the quarter ended March 31, 2002, from
$11.7 million for the quarter ended March 31, 2002. Corporate costs increased
$2.0 million, or 25.1%, principally resulting from higher legal expenses of $1.3
million primarily resulting from corporate matters associated with various
investigations related to a personal sale of non-Company stock by the Company's
Chairman and Chief Executive Officer and higher insurance costs of $0.8 million.
Internet/Direct Commerce segment costs increased $1.0 million resulting from
higher consulting fees of $0.7 million and severance costs of $0.5 million
related to the restructuring of the segment, partially offset by lower
compensation costs due to lower headcount.
Depreciation and amortization. Depreciation and amortization decreased $0.9
million, or 29.0%, to $2.1 million for the quarter ended March 31, 2003, from
$3.0 million for the quarter ended March 31, 2002. The decrease is primarily due
to lower depreciation associated with the Company's website, which was written
down by $6.1 million in the fourth quarter of 2002 in connection with a
restructuring of the Internet/Direct Commerce segment.
Interest income, net. Interest income, net, was $0.4 million for the quarter
ended March 31, 2003, compared with $0.5 million for the quarter ended March 31,
2002. Higher average cash balances throughout the quarter were more than offset
by lower interest yields on cash and short-term investments.
-11-
Income tax benefit (provision). Income tax benefit for the quarter ended March
31, 2003 was $2.8 million, representing a 40% effective income tax rate,
compared to an income tax provision of $2.6 million representing an effective
income tax rate of 41.0% for the quarter ended March 31, 2002. The effective
income tax rate in 2003 reflects the federal benefit of 35% associated with the
Company's loss in the quarter, in addition to the tax benefit of foreign income
taxes in the quarter. State tax benefits available to the Company resulting from
the carry-back of losses to prior years is limited. Accordingly, the Company has
not recognized any state tax benefit for the quarter ended March 31, 2003.
Furthermore, no tax benefit has been assumed for state and local loss
carry-forwards to future periods.
Loss from discontinued operations. Loss from discontinued operations was $0.2
million for the quarter ended March 31, 2003, compared to $0.8 million from the
same operations for the quarter ended March 31, 2002. Discontinued operations
represent the operations of The Wedding List, which the Company decided to
discontinue in 2002.
Cumulative Effect Of Accounting Change. As part of the implementation of SFAS
No. 142, the Company completed the initial impairment tests in the second
quarter of 2002, with a January 1 effective date, which resulted in a charge of
approximately $5.0 million ($3.1 million after taxes) to reduce the carrying
value of its goodwill related to the Internet/Direct Commerce segment
attributable to its 2001 acquisition of The Wedding List. The remaining
intangible assets represent goodwill of the Publishing segment and its fair
value exceeds the carrying value.
Net Loss. Net loss was ($4.5) million for the quarter ended March 31, 2003,
compared to a net loss of ($0.2) million for the quarter ended March 31, 2002,
as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $119,257 and $131,664 and short-term investments
were $47,286 and $47,286 at March 31, 2003 and December 31, 2002, respectively.
Cash flows used in operating activities were $12.1 million during the three
months ended March 31, 2003, compared to cash provided by operating activities
of $3.0 million during the three months ended March 31, 2002. Cash used in
operating activities during the three months ended March 31, 2003 were primarily
due to a net loss for the period of $4.5 million and changes in operating assets
and liabilities of $9.9 million, partially offset by depreciation and
amortization of $2.1 million. Cash used by changes in operating assets and
liabilities during the quarter is primarily a result of decreases in accounts
payable and accrued liabilities and accrued payroll and related costs, partially
offset by decreased accounts receivable. During the three months ended March 31,
2002, cash flows from operating activities resulted primarily from a non-cash
charge of $3.1 million resulting from the cumulative effect of an accounting
change resulting from the adoption of FAS No. 142 and depreciation and
amortization of $3.1 million, partially offset by changes in operating assets
and liabilities of $3.0 million and the net loss in the period. Cash used by
changes in operating assets and liabilities during the three months ended March
31, 2002 is primarily a result of decreases in accounts payable and accrued
liabilities and accrued payroll and related costs, partially offset by decreased
accounts receivable.
Cash flows used in investing activities were $0.3 million and $19.1 million
during the three months ended March 31, 2003 and 2002, respectively. Cash flows
used in investing activities in 2003 resulted from capital expenditures. Cash
flows used in investing activities in 2002 resulted from increased short-term
investments of $17.2 million and capital expenditures of $1.9 million.
Cash flows provided by financing activities for the three months ended March 31,
2002 of $1.7 million was due to proceeds received from the exercise of stock
options.
We have a line of credit with Bank of America in the amount of $10 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of March 31, 2003, 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.
-12-
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, in our Publishing segment, the publication schedule of special
interest publications can vary from quarter to quarter. Revenues and income from
operations for the Television segment have historically tended to be higher in
the fourth quarter due primarily to the broadcast of a holiday prime-time
television special, however, no such special aired in 2002. Internet/Direct
Commerce revenues have tended to be higher in the fourth quarter due to
increased catalog circulation and consumer spending during that period although
revenue in the fourth quarter of 2003 will likely be lower than revenue in the
fourth quarter of 2002 due to a planned catalog circulation decline. Revenues
from the Merchandising segment can vary significantly from quarter to quarter
due to new product launches and the seasonality of certain product lines.
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 accounting principles generally accepted in the United
States. 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
Revenues are recognized 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. The
Company bases its estimates on 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 condition
of our 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 and are generally paid on a quarterly
basis. For the three month period ended March 31, 2003, the Company has
recognized royalty revenues earned under our agreement with Kmart based upon
actual royalties earned, not contractual minimum amounts. Contractual minimum
amounts under the agreement with Kmart are computed on January 31st annually and
are payable shortly thereafter. We expect to recognize the difference between
the minimum royalty amount and royalties paid on actual sales in the fourth
quarter of 2003, when the amount can be determined.
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Inventory
Inventory, consisting of paper and product merchandise, is stated at the lower
of cost or market. The Company has recorded a reserve for excess and obsolete
product inventory, reducing inventory from cost to estimated market value, based
upon historical experience and current market conditions. The reserve is
adjusted regularly based upon actual results.
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.
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.
TRENDS AND UNCERTAINTIES
The United States Attorney's office and the Securities and Exchange Commission
are investigating the sale of shares of stock owned in another company, ImClone
Systems, by Martha Stewart, our Chairman and Chief Executive Officer, and
certain related matters. Because our principal brand labels are closely
associated with Ms. Stewart, we have seen, and expect to continue to see,
substantial negative impacts on our business as a result of the uncertainty
surrounding these ongoing investigations and associated negative publicity.
Although it is difficult to quantify with any precision, we believe that, to
date, the uncertainty and publicity surrounding these investigations have
contributed to the following trends and uncertainties in our business: a decline
in the circulation results and prospects of our magazines; a decrease in
advertising revenues and a general uncertainty in our advertising sales
prospects; a softness in response rates in our direct commerce business; and a
slowdown in new business development and new partner initiatives. While we
believe that a positive resolution to these investigations would have a positive
impact on our business, and a negative resolution would have a negative impact
on our business, we are unable to predict with any certainty the extent to which
our business would be impacted in either event. In addition, the Company is
incurring additional expenses, principally relating to corporate communications
and corporate professional fees, associated with the ongoing investigations and
related litigation.
Our Merchandising segment is highly dependent on Kmart Corporation, which has
recently emerged from operating under Chapter 11 of the United States Bankruptcy
Code. To the extent that Kmart is unable to successfully operate outside of
Chapter 11, we would need to secure alternative domestic distribution for our
Martha Stewart Everyday product lines. If such distribution of our products were
not secured on comparable terms it would have a material adverse effect on our
results of operations. In 2003, we expect our royalties based on actual product
sales to be less than those guaranteed in our contract with Kmart. Because of
the particular mechanics relating to the minimum guarantee amounts in the
contract, it is impossible to ascertain at this time the exact amount that will
be payable to us under that provision. However, the aggregate amount payable to
us under the contract for the twelve-month period ending January 31, 2004 will
be at least $47.5 million.
In March 2003, we commenced a restructuring of our Internet/Direct Commerce
segment. We expect this restructuring will result in decreased revenues, costs
and operating losses from this segment in 2003, although we cannot predict with
certainty the extent and timing of these decreases.
For the television season that begins in September 2003, the Company has secured
distribution in approximately 90% of the US television households. However, we
expect license fees from the program to be lower than the prior season.
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ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, 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). 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. 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.
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 officers (Gregory R. Blatt, Dora Braschi Cardinale, Sharon L.
Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey
(collectively, the "Individual Defendants")) as defendants. The action
consolidates 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 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 allege that the Individual Defendants traded MSO stock
while in possession of material non-public information. The Consolidated Class
Action Complaint seeks certification as a class action, damages, attorney's fees
and costs, and further relief as determined by the court.
The Company has also been named as a nominal defendant in four derivative
actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart
Living Omnimedia, Inc. Shareholder Derivative Litigation, filed on December 19,
2002 in New York State Supreme Court (the "Consolidated NY Derivative
Litigation"); Beam v. Stewart, initially filed on August 15, 2002 and amended on
September 6, 2002, in Delaware Chancery Court; Acosta v. Stewart, filed on
October 10, 2002 in the U.S. District Court for the Southern District of New
York; and Richards v. Stewart, filed on November 1, 2002 in Connecticut Superior
Court. The Company's present directors and former director, John Doerr, are also
named as defendants in Beam. The Company's present directors, Mr. Doerr, five of
the Company's other officers (Mr. Blatt, Ms. Cardinale, Ms. Roach, Ms. Sobel,
and Ms. Towey), and Kleiner Perkins Caufield & Byers are also named as
defendants in Richards. The Consolidated NY Derivative Litigation consolidates
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.
All four derivative actions allege that Ms. Stewart breached her fiduciary
duties to the Company by engaging in insider trading in ImClone stock and making
false and misleading statements about such trading. The plaintiffs allege that
these actions have diminished Ms. Stewart's reputation and injured the Company
through lost revenues, loss of reputation and good will, decreased stock price,
and increased costs. The plaintiff in Beam further alleges that (i) Ms.
Stewart's actions have jeopardized the Company's intellectual property; (ii) the
directors breached their fiduciary duties by failing to monitor Ms. Stewart's
affairs to ensure she did not harm the Company; (iii) Ms. Stewart and the other
directors breached their fiduciary duties by failing to address the impropriety
of the Company's payment of split dollar insurance premiums; and (iv) Ms.
Stewart and Mr. Doerr usurped corporate opportunities by selling
personally-owned Company stock to an investment firm without first presenting
the Company with the opportunity to sell its stock to the firm.
-15-
The plaintiffs in the Consolidated NY Derivative Litigation also allege that Ms.
Stewart breached the terms of her employment agreement with the Company. The
plaintiff in Richards further alleges (i) intentional breach of fiduciary duty
by, among other things, acting in reckless disregard of, and failing to prevent,
Ms. Stewart's insider trading in ImClone stock, violating federal securities
laws by selling Company stock while in possession of material, non-public
information, misuse of corporate information, and gross mismanagement of the
Company; (ii) negligent breach of fiduciary duty; (iii) abuse of control; (iv)
constructive fraud; (v) gross mismanagement; and (vi) waste.
The derivative actions seek damages in favor of the Company, attorneys' fees and
costs, and further relief as determined by the court. Certain of the complaints
also seek declaratory relief. The plaintiffs in the Consolidated NY Derivative
Litigation further seek the creation of a committee or other administrative
mechanism to address the alleged "corporate governance" issues raised in the
complaints and to protect the Company's "cornerstone assets." The plaintiff in
Richards further seeks injunctive relief in the form of attachment or other
restriction of the proceeds of defendants' trading activities or other assets.
The Company has moved to dismiss (i) the Consolidated Class Action Complaint,
(ii) the Beam complaint, and (iii) the Consolidated NY Derivative Litigation.
The motions with respect to the Consolidated Class Action Complaint and the Beam
complaint are pending. In the Consolidated NY Derivative Litigation, the court
granted the Company's motion to the extent that the action is stayed pending the
making by plaintiffs of a proper pre-suit demand on the Company's board of
directors or a determination by the federal district court in the Acosta
litigation that such a demand would be futile. The Richards action has been
stayed by stipulation pending resolution of the Beam motion to dismiss. The
plaintiff in the Acosta action has been granted leave to file an amended
complaint no later than June 5, 2003, which the Company may move to dismiss by
July 7, 2003.
While still in their early stages, we believe the Company has substantial
defenses to these actions.
ITEM 5. OTHER INFORMATION
Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of
1995 and Associated 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. 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. The
Company's actual results may differ materially from those projected in these
statements, and factors that could cause such differences include prolonged and
continued 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 uncertainty relating to the nature and timing of the resolution of the
ongoing governmental investigations concerning a sale of non-Company stock by
Martha Stewart and any adverse resolution of such investigations; adverse
resolution of some or all of the Company's ongoing litigation; downturns in
national and/or local economies; an inability to execute the restructuring of
our Internet/Direct Commerce segment as planned; shifts in our business
strategies; 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 sections of this report, especially under the heading
"Management's Discussion and Analysis."
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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
------ -------------
99.1 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
On April 30, 2003, the Company filed a Current Report on Form 8-K
reporting its earnings for its fiscal first quarter ended March 31, 2003.
On May 7, 2003, the Company filed a Current Report on Form 8-K providing a
transcript of its earnings conference call held on April 30, 2003.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTHA STEWART LIVING OMNIMEDIA, INC.
Date: May 15, 2003 By: /s/ James Follo
----------------------------------------------------
Name: James Follo
Title: Executive Vice President, Chief Financial Officer
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CERTIFICATIONS
I, Martha Stewart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Martha Stewart
Living Omnimedia, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a.) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b.) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b.) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Martha Stewart
- ------------------------------------
Chairman and Chief Executive Officer
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I, James Follo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Martha Stewart
Living Omnimedia, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b.) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b.) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ James Follo
- -------------------------------
Chief Financial Officer
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