Attached files
file | filename |
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EX-32 - EXHIBIT 32 - MARTHA STEWART LIVING OMNIMEDIA INC | c00570exv32.htm |
EX-31.1 - EXHIBIT 31.1 - MARTHA STEWART LIVING OMNIMEDIA INC | c00570exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - MARTHA STEWART LIVING OMNIMEDIA INC | c00570exv31w2.htm |
EX-10.1 - EXHIBIT 10.1 - MARTHA STEWART LIVING OMNIMEDIA INC | c00570exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-15395
MARTHA STEWART LIVING OMNIMEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 52-2187059 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
601 West 26th Street, New York, NY | 10001 | |
(Address of principal executive offices) | (Zip Code) |
(Registrants telephone number, including area code) (212) 827-8000
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Class | Outstanding as of May 4, 2010 | |||
Class A, $0.01 par value |
28,282,768 | |||
Class B, $0.01 par value |
26,690,125 | |||
Total |
54,972,893 | |||
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
Page | ||||||||
3 | ||||||||
13 | ||||||||
22 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
26 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Balance Sheets
(in thousands, except per share amounts)
Consolidated Balance Sheets
(in thousands, except per share amounts)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 36,107 | $ | 25,384 | ||||
Short-term investments |
9,614 | 13,085 | ||||||
Accounts receivable, net |
41,301 | 56,364 | ||||||
Inventories |
5,553 | 5,166 | ||||||
Deferred television production costs |
4,689 | 3,788 | ||||||
Other current assets |
6,459 | 5,709 | ||||||
Total current assets |
103,723 | 109,496 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net |
16,314 | 17,268 | ||||||
GOODWILL, net |
45,107 | 45,107 | ||||||
OTHER INTANGIBLE ASSETS, net |
47,067 | 47,070 | ||||||
OTHER NONCURRENT ASSETS, net |
13,576 | 10,850 | ||||||
Total assets |
$ | 225,787 | $ | 229,791 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable and accrued liabilities |
$ | 24,725 | $ | 26,752 | ||||
Accrued payroll and related costs |
6,343 | 7,495 | ||||||
Current portion of deferred subscription revenue |
19,753 | 18,587 | ||||||
Current portion of other deferred revenue |
6,260 | 4,716 | ||||||
Total current liabilities |
57,081 | 57,550 | ||||||
DEFERRED SUBSCRIPTION INCOME |
5,474 | 5,672 | ||||||
OTHER DEFERRED REVENUE |
2,561 | 2,759 | ||||||
LOAN PAYABLE |
12,000 | 13,500 | ||||||
DEFERRED INCOME TAX LIABILITY |
3,569 | 3,200 | ||||||
OTHER NONCURRENT LIABILITIES |
3,442 | 3,290 | ||||||
Total liabilities |
84,127 | 85,971 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Class A Common Stock, $.01 par value, 350,000 shares
authorized; 28,303 and 28,313 shares outstanding in 2010
and 2009, respectively |
283 | 283 | ||||||
Class B Common Stock, $.01 par
value, 150,000 shares authorized; 26,690 shares outstanding in both 2010 and 2009 |
267 | 267 | ||||||
Capital in excess of par value |
292,026 | 290,387 | ||||||
Accumulated deficit |
(150,470 | ) | (146,605 | ) | ||||
Accumulated other comprehensive income |
329 | 263 | ||||||
142,435 | 144,595 | |||||||
Less: Class A Treasury Stock 59 shares at cost |
(775 | ) | (775 | ) | ||||
Total shareholders equity |
141,660 | 143,820 | ||||||
Total liabilities and shareholders equity |
$ | 225,787 | $ | 229,791 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
REVENUES |
||||||||
Publishing |
$ | 28,251 | $ | 28,361 | ||||
Broadcasting |
12,091 | 10,514 | ||||||
Internet |
3,085 | 2,622 | ||||||
Merchandising |
9,809 | 8,933 | ||||||
Total revenues |
53,236 | 50,430 | ||||||
OPERATING COSTS AND EXPENSES |
||||||||
Production, distribution and editorial |
27,529 | 28,170 | ||||||
Selling and promotion |
14,607 | 14,781 | ||||||
General and administrative |
13,347 | 14,113 | ||||||
Depreciation and amortization |
1,122 | 1,751 | ||||||
Impairment charge |
| 7,100 | ||||||
Total operating costs and expenses |
56,605 | 65,915 | ||||||
OPERATING LOSS |
(3,369 | ) | (15,485 | ) | ||||
OTHER EXPENSE |
||||||||
Interest expense, net |
(81 | ) | (8 | ) | ||||
Loss on equity securities |
| (757 | ) | |||||
Other loss |
| (236 | ) | |||||
Total other expense |
(81 | ) | (1,001 | ) | ||||
LOSS BEFORE INCOME TAXES |
(3,450 | ) | (16,486 | ) | ||||
Income tax provision |
(415 | ) | (358 | ) | ||||
NET LOSS |
$ | (3,865 | ) | $ | (16,844 | ) | ||
LOSS PER SHARE BASIC AND DILUTED |
||||||||
Net Loss |
$ | (0.07 | ) | $ | (0.31 | ) | ||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
||||||||
Basic and Diluted |
54,327 | 53,766 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders Equity
For the Three Months Ended March 31, 2010
(unaudited, in thousands)
Consolidated Statement of Shareholders Equity
For the Three Months Ended March 31, 2010
(unaudited, in thousands)
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Class A | Class B | other | Class A | |||||||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Capital in excess | Accumulated | comprehensive | Treasury Stock | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | of par value | deficit | income | Shares | Amount | Total | |||||||||||||||||||||||||||||||
Balance at January 1, 2010 |
28,313 | $ | 283 | 26,690 | $ | 267 | $ | 290,387 | $ | (146,605 | ) | $ | 263 | (59 | ) | $ | (775 | ) | $ | 143,820 | ||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | (3,865 | ) | | | | (3,865 | ) | ||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Unrealized gain on investment |
| | | | | | 66 | | | 66 | ||||||||||||||||||||||||||||||
Total comprehensive loss |
| | | | | | | | | (3,799 | ) | |||||||||||||||||||||||||||||
Issuance of shares in conjunction with stock option exercises |
11 | | | | 21 | | | | | 21 | ||||||||||||||||||||||||||||||
Issuance of shares of stock and restricted stock, net of
cancellations and tax withholdings |
(21 | ) | | | | (133 | ) | | | | | (133 | ) | |||||||||||||||||||||||||||
Non-cash equity compensation |
| | | | 1,751 | | | | | 1,751 | ||||||||||||||||||||||||||||||
Balance at March 31, 2010 |
28,303 | $ | 283 | 26,690 | $ | 267 | $ | 292,026 | $ | (150,470 | ) | $ | 329 | (59 | ) | $ | (775 | ) | $ | 141,660 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (3,865 | ) | $ | (16,844 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Non-cash revenue |
(5,167 | ) | (926 | ) | ||||
Depreciation and amortization |
1,122 | 1,751 | ||||||
Amortization of deferred television production costs |
4,523 | 5,078 | ||||||
Impairment on cost-based investment |
| 7,100 | ||||||
Non-cash equity compensation |
1,787 | 1,632 | ||||||
Deferred income tax expense |
369 | 343 | ||||||
Loss on equity securities |
| 757 | ||||||
Other non-cash charges, net |
212 | 475 | ||||||
Changes in operating assets and liabilities |
11,491 | 3,131 | ||||||
Net cash provided by operating activities |
10,472 | 2,497 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(1,787 | ) | (1,516 | ) | ||||
Purchases of short-term investments |
(7,465 | ) | (10,233 | ) | ||||
Sales of short-term investments |
10,982 | 10,292 | ||||||
Net cash provided by/(used in) investing activities |
1,730 | (1,457 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayment of long-term debt |
(1,500 | ) | (1,500 | ) | ||||
Proceeds from exercise of stock options |
21 | | ||||||
Net cash used in financing activities |
(1,479 | ) | (1,500 | ) | ||||
Net increase/(decrease) in cash |
10,723 | (460 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
25,384 | 50,204 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 36,107 | $ | 49,744 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Notes to Consolidated Financial Statements
(unaudited)
1. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to
as we, us, our, or the Company.
The information included in the foregoing interim consolidated financial statements is
unaudited. In the opinion of management, all adjustments, all of 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 therein. The results of operations for interim periods do not
necessarily indicate the results to be expected for the entire year. These consolidated financial
statements are unaudited and should be read in conjunction with the audited financial statements
included in the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the SEC) with respect to the Companys fiscal year ended December 31, 2009 (the 2009
10-K) which may be accessed through the SECs website at http://www.sec.gov.
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) 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 Companys
consolidated financial statements.
2. Recent Accounting Standards
Revenue Recognition for Multiple-Deliverable Revenue Arrangements
In October 2009,
the Financial Accounting Standards Board (FASB) issued ASU No. 09-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a
consensus of the FASB Emerging Issues Task Force) (ASU 09-13). The Company adopted this standard on January 1,
2010. The adoption of this standard did not have a material impact on the Companys consolidated
financial statements.
The Company participates in certain arrangements containing multiple deliverables. These
arrangements generally consist of custom-created advertising programs delivered on multiple media
platforms, as well as licensing programs which may also be supported by various promotional plans.
Examples of significant program deliverables include print advertising pages in the Companys
publications, commercial spots and product integrations on the Companys television and radio
programs, and advertising impressions delivered on the Companys
websites. Arrangements that were
executed prior to January 1, 2010 are accounted for in accordance with the provisions of Accounting
Standards Codification (ASC) Topic 605, Revenue Recognition (ASC 605). Because the Company
has elected to early adopt, on a prospective basis, ASU 09-13, arrangements executed on or
after January 1, 2010 are subject to the new guidance. ASU 09-13 updates the existing
multiple-element arrangement guidance currently in ASC 605.
The determination of units of accounting includes several criteria under both ASC 605 and ASU
09-13. Consistent with ASC 605, ASU 09-13 requires that the Company examine separate contracts with
the same entity or related parties that are entered into or near the same time to determine if the
arrangements should be considered a single arrangement in the determination of units of accounting.
While both ASC 605 and ASU 09-13 require that units delivered have standalone value to the
customer, ASU 09-13 modifies the separation criteria in determining units of accounting by
eliminating the requirement to obtain objective and reliable evidence of the fair value of
undelivered items. As a result of the elimination of this requirement, the Companys significant
program deliverables generally meet the separation criteria under ASU 09-13, whereas under ASC 605
they did not qualify as separate units of accounting.
For those arrangements accounted for under ASC 605, if the Company is unable to put forth
objective and reliable evidence of the fair value of each deliverable, then the Company accounts
for the deliverables as a combined unit of accounting rather than separate units of accounting. In
this case, the arrangement fee is recognized as revenue as the earnings process is completed,
generally over the fulfillment term of the last deliverable.
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Table of Contents
For those arrangements accounted for under ASU 09-13, the Company is required to allocate
revenue based on the relative selling price of each deliverable which qualifies as a unit of
accounting, even if such deliverables are not sold separately by either the Company itself or other
vendors. Determination of selling price is a judgmental process
which requires numerous assumptions. The consideration is allocated at the inception of the
arrangement to all deliverables based upon their relative selling prices. Selling prices for
deliverables that qualify as separate units of accounting are determined using a hierarchy of: 1)
vendor-specific objective evidence (VSOE), 2) third-party evidence, and 3) best estimate of
selling price. The Company is able to establish VSOE for certain of its contract deliverables,
however, in most instances it has allocated consideration based upon its best estimate of selling
price. The Company established VSOE of certain deliverables by demonstrating that a substantial
majority of the recent standalone sales of those deliverables are priced within a relatively narrow
range. The Companys best estimate of selling price is intended to represent the price at which it
would sell the deliverable if the Company were to sell the item regularly on a standalone basis.
The Companys estimates consider market conditions, such as competitor pricing pressures, as well
as entity-specific factors that are consistent with normal pricing practices, such as the recent
history of the selling prices of similar products when sold on a standalone basis, the impact of
the cost of customization, the size of the transaction, and other factors contemplated in
negotiating the arrangement with the customer. The arrangement fee is recognized as revenue as the
earnings process is completed, generally at the time each unit of accounting is fulfilled.
Investments in Other Non-Current Assets
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments
to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 amends certain requirements of FASB
Interpretation No. 46(R) (FIN 46R) to improve financial reporting by enterprises involved with a
variable interest entity (VIE) and provides more relevant and reliable information to users of
financial statements. Among other changes, the amendments to FIN 46R replace the existing
quantitative approach for identifying the party that should consolidate a VIE, which was based on
exposure to a majority of the risks and rewards, with a qualitative approach, based on
determination of which party has the power to direct the most economically significant activities
of the entity. Under the new guidance, a VIE must be consolidated if the enterprise has both
(a) the power to direct the activities of the VIE that most significantly impact the entitys
economic performance, and (b) the obligation to absorb losses or the right to receive benefits from
the VIE that could potentially be significant to the VIE. The new guidance also requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE and amends certain
guidance for determining whether an entity is a VIE.
SFAS 167 has a similar scope as FIN 46R, with the addition of entities previously considered
qualifying special purpose entities and is effective for the first annual reporting period
beginning after November 15, 2009, for interim periods within that first annual reporting period,
and for interim and annual reporting periods thereafter, with earlier application prohibited. In
December 2009, the FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities (ASU 09-17). The purpose of this ASU is to bring SFAS
167 (as discussed above) into the Codification by amending Accounting Standards Codification Topic
810, Consolidation. The application of ASU 09-17 did not have an impact on the Companys
financial condition or results of operations.
The Company has cost-based investments which represent investments in preferred stock. As of
March 31, 2010, the Companys aggregate carrying value of these investments was $5.7 million and
has been included within other noncurrent assets in the consolidated balance sheet. The Company has
determined that certain of these investments represent interests in VIEs. As of March 31, 2010, the
Companys investments in the entities were substantially its maximum exposure to loss. There are no
future contractual funding commitments at this time. The Company has determined that the Company is
not the primary beneficiary of these entities since the Company does not have the power to direct
the activities that most significantly impact the entities economic performance. Accordingly, the
Company does not consolidate these entities and accounts for these investments under the cost
method.
Other
Significant Accounting Policies
The Companys other significant accounting policies are discussed in more detail in the 2009
10-K, especially under the heading Note 2, Summary of Significant Accounting Policies.
3. Other
Production, distribution and editorial expenses; selling and promotion expenses; and general
and administrative expenses are all presented exclusive of depreciation and amortization, which is
shown separately within Operating Costs and Expenses.
8
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Certain prior year financial information has been reclassified to conform to 2010 financial
statement presentation. Beginning in the second quarter of 2009, certain investments in equity
securities previously accounted for under the equity method are accounted for under the cost
method.
4. Fair Value Measurements
The Company categorizes its assets and liabilities measured at fair value into a fair value
hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of
the fair value hierarchy are:
Level 1: Observable inputs such as quoted prices for identical assets and
liabilities in active markets obtained from independent sources.
Level 2: Other inputs that are observable directly or indirectly, such as quoted
prices for similar assets or liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active and inputs that are
derived principally from or corroborated by observable market data. The fair value of
the Companys level 2 financial assets is primarily obtained from observable market
prices for identical underlying securities that may not be actively traded. Certain of
these securities may have different market prices from multiple market data sources, in
which case a weighted average market price is used.
Level 3: Unobservable inputs for which there is little or no market data and
require the Company to develop its own assumptions, based on the best information
available in the circumstances, about the assumptions market participants would use in
pricing the asset or liability.
The following tables present the Companys assets and liabilities that are measured at fair
value on a recurring basis:
March 31, 2010 | ||||||||||||||||
Quoted | ||||||||||||||||
Market | ||||||||||||||||
Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | Total | |||||||||||||
Assets | Inputs | Inputs | Fair Value | |||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Measurements | ||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | | $ | 3,842 | $ | | $ | 3,842 | ||||||||
Short-term investments: |
||||||||||||||||
Marketable equity securities |
2,184 | | | 2,184 | ||||||||||||
U.S. government and agency
securities |
| 682 | | 682 | ||||||||||||
Corporate obligations |
| 5,767 | | 5,767 | ||||||||||||
Other fixed income securities |
| 981 | | 981 | ||||||||||||
Other current assets: |
||||||||||||||||
Marketable equity securities |
914 | | | 914 | ||||||||||||
Total |
$ | 3,098 | $ | 11,272 | $ | | $ | 14,370 | ||||||||
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December 31, 2009 | ||||||||||||||||
Quoted | ||||||||||||||||
Market | ||||||||||||||||
Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | Total | |||||||||||||
Assets | Inputs | Inputs | Fair Value | |||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Measurements | ||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | | $ | 332 | $ | | $ | 332 | ||||||||
Short-term investments: |
||||||||||||||||
Four month certificate of deposit |
| 10,948 | | 10,948 | ||||||||||||
Marketable equity securities |
2,137 | | | 2,137 | ||||||||||||
Other current assets: |
||||||||||||||||
Marketable equity securities |
895 | | | 895 | ||||||||||||
Total |
$ | 3,032 | $ | 11,280 | $ | | $ | 14,312 | ||||||||
Marketable Equity Securities
The cost basis of
the marketable equity securities is $2.8 million and the Company recognized $0.3
million through March 31, 2010 in cumulative unrealized gains included in other comprehensive
income. No other income has been recorded related to these investments.
Assets measured at fair value on a nonrecurring basis
The Companys non-financial assets, such as goodwill, intangible assets and property and
equipment, as well as, cost method investments, are measured at fair value when there is an
indicator of impairment and recorded at fair value only when an impairment charge is recognized.
Such impairment charges incorporate fair value measurements based on level 3 inputs.
5. Inventory
Inventory is comprised of paper stock. The inventory balances at March 31, 2010 and December
31, 2009 were $5.6 million and $5.2 million, respectively.
6. Credit Facilities
The Company has a line of credit with Bank of America in the amount of $5.0 million, which is
generally used to secure outstanding letters of credit. The line was renewed as of June 30, 2009
for a one-year period. The renewal included certain substantive changes from the prior years
terms, including a covenant to maintain $5.0 million in liquidity, as defined in the credit
agreement and the reduction of the current ratio requirement from 1.5:1.0 to 1.25:1.0. The Company
was compliant with the debt covenants as of March 31, 2010. The Company had no outstanding
borrowings under this facility as of March 31, 2010 and had letters of credit of $2.8 million.
In April 2008, the Company entered into a loan agreement with Bank of America in the amount of
$30.0 million related to the acquisition of certain assets of Emeril Lagasse. The loan agreement
requires equal principal payments of $1.5 million and accrued interest to be paid by the Company
quarterly for the duration of the loan term, approximately 5 years. In the first quarter of 2010,
the Company prepaid $1.5 million in principal representing amounts due through March 31, 2011.
Through that date, there are no principal payments due. The interest rate is equal to a floating
rate of 1-month LIBOR plus 2.85%.
The loan terms require the Company to be in compliance with certain financial covenants,
failure with which to comply would result in an event of default and would permit Bank of America
to accelerate and demand repayment of the loan in full. The Company was compliant with the debt
covenants as of March 31, 2010.
A summary of the most significant financial and other covenants are discussed in more detail
in the 2009 10-K, especially under the heading Note 7, Credit Facilities.
10
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7. Income taxes
The Company follows ASC Topic 740, Income Taxes (ASC 740). Under the asset and liability
method of ASC 740, deferred assets and liabilities are recognized for the future costs and benefits
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The Company periodically reviews the requirements for a
valuation allowance and makes adjustments to such
allowances when changes in circumstances result in changes in managements judgment about the
future realization of deferred tax assets. ASC 740 places more emphasis on historical information,
such as the Companys cumulative operating results and its current year results than it places on
estimates of future taxable income. Therefore, the Company has added $1.7 million to its valuation
allowance in the three months ended March 31, 2010, resulting in a cumulative balance of $75.0
million as of March 31, 2010. In addition, the Company has recorded $0.4 million of tax expense
during the three months ended March 31, 2010 which is primarily attributable to differences between
the financial statement carrying amounts of current and prior year acquisitions of certain
indefinite-lived intangible assets and their respective tax bases which resulted in a net deferred
tax liability of $3.6 million. The Company intends to maintain a valuation allowance until evidence
would support the conclusion that it is more likely than not that the deferred tax assets could be
realized.
ASC 740 further establishes guidance on the accounting for uncertain tax positions. As of
March 31, 2010, the Company had an ASC 740 liability balance of $0.2 million, of which $0.15
million represented unrecognized tax benefits, which if recognized at some point in the future
would favorably impact the effective tax rate, and $0.05 million was interest. The Company is no
longer subject to U.S. federal income tax examinations by tax authorities for the years before 2005
and state examinations for the years before 2003. The Company anticipates that as a result of audit
settlements and statute closures over the next twelve months, the liability will be reduced through
cash payments of approximately $0.1 million.
8. Equity compensation
Prior to May 2008, the Company had several stock incentive plans that permitted the Company to
grant various types of share-based incentives to key employees, directors and consultants. The
primary types of incentives granted under these plans were stock options and restricted shares of
common stock. The Compensation Committee of the Board of Directors was authorized to grant up to a
maximum of 10,000,000 underlying shares of Class A Common Stock under the Martha Stewart Living
Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the 1999 Option Plan), and up to
a maximum of 600,000 underlying shares of Class A Common Stock under the Companys Non-Employee
Director Stock and Option Compensation Plan (the Non-Employee Director Plan).
In April 2008, the Companys Board of Directors adopted the Martha Stewart Living Omnimedia,
Inc. Omnibus Stock and Option Compensation Plan (the New Stock Plan), which was approved by the
Companys stockholders at the Companys 2008 annual meeting. The New Stock Plan has 10,000,000
shares available for issuance. The New Stock Plan replaced the 1999 Option Plan and Non-Employee
Director Plan (together, the Prior Plans), which together had an aggregate of approximately
1,850,000 shares still available for issuance. Therefore, the total net effect of the replacement
of the Prior Plans and adoption of the New Stock Plan was an increase of approximately 8,150,000
shares of Class A Common Stock available for issuance under the Companys stock plans.
From time to time the Company makes equity awards to certain employees pursuant to the New
Stock Plan. On March 1, 2010, the Company granted awards to multiple recipients. The awards
consisted of, in the aggregate, options to purchase 700,000 shares at an exercise price of $5.48
per share (the closing price on the date of grant), which options vest over a four-year period, and
550,000 performance-based restricted stock units, each of which represents the right to a share of
the Companys Class A Common Stock if the Company achieves targets over a performance period. The
performance-based restricted stock unit awards are considered probable of vesting. Accordingly, the
Company measured the grant date fair value of these awards as of the date of issuance and is
recognizing the fair value over the remaining service period of the awards.
On March 1, 2010, in recognition of changing economic conditions and to ensure the continued
retention and motivation of key employees, the Companys Compensation Committee approved a
modification to the performance conditions associated with the March 2, 2009 performance-based
restricted stock units. As a result, these awards are now considered probable of vesting.
Accordingly, the Company measured the fair value of these awards as of the date of modification and
is recognizing the fair value over the remaining service period of the awards.
9. Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. The Companys
comprehensive loss includes net loss and unrealized gains and losses on available-for-sale
securities. Total comprehensive loss for the three months ended March 31, 2010 and 2009, was $3.8
million and $16.8 million, respectively.
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10. Industry Segments
The Company is an integrated media and merchandising company providing consumers with
inspiring lifestyle content and programming, and well-designed, high-quality products. The
Companys business segments are Publishing, Broadcasting, Internet and Merchandising. The
Publishing segment primarily consists of the Companys magazine operations, and also those related
to its book operations. The Broadcasting segment consists of the Companys television production
operations which produce television programming and other licensing revenue from programs that air
in syndication and on cable, as well as the Companys radio operations. The Martha Stewart Show
currently airs in syndication seasonally over a 12-month period beginning and ending in the middle
of September. The Internet segment primarily consists of the content-driven website
marthastewart.com supported by advertising. The Merchandising segment primarily consists of the
Companys operations related to the design of merchandise and related promotional and packaging
materials that are distributed by its retail and manufacturing licensees in exchange for royalty
income. The accounting policies for the Companys business segments are discussed in more detail in
the 2009 10-K, especially under the heading Note 2, Summary of Significant Accounting Policies.
Segment information for the quarters ended March 31, 2010 and 2009 is as follows:
(in thousands) | Publishing | Broadcasting | Internet | Merchandising | Corporate | Consolidated | ||||||||||||||||||
2010 |
||||||||||||||||||||||||
Revenues |
$ | 28,251 | $ | 12,091 | $ | 3,085 | $ | 9,809 | $ | | $ | 53,236 | ||||||||||||
Non-cash equity compensation |
225 | 170 | 9 | 373 | 1,010 | 1,787 | ||||||||||||||||||
Depreciation and amortization |
51 | 65 | 384 | 12 | 610 | 1,122 | ||||||||||||||||||
Operating income/(loss) |
(1,094 | ) | 3,178 | (1,469 | ) | 5,324 | (9,308 | ) | (3,369 | ) | ||||||||||||||
Total assets |
71,931 | 30,265 | 12,775 | 70,839 | 39,977 | 225,787 | ||||||||||||||||||
2009 |
||||||||||||||||||||||||
Revenues |
$ | 28,361 | $ | 10,514 | $ | 2,622 | $ | 8,933 | $ | | $ | 50,430 | ||||||||||||
Non-cash equity compensation |
435 | 128 | 41 | 157 | 871 | 1,632 | ||||||||||||||||||
Depreciation and amortization |
74 | 69 | 452 | 18 | 1,138 | 1,751 | ||||||||||||||||||
Impairment charge other asset |
| | | 7,100 | | 7,100 | ||||||||||||||||||
Operating income/(loss) |
(1,872 | ) | 834 | (2,032 | ) | (1,776 | ) | (10,639 | ) | (15,485 | ) | |||||||||||||
Total assets |
73,250 | 27,689 | 11,585 | 68,704 | 57,323 | 238,551 |
11. Related Party Transactions
On June 13, 2008, the Company entered into an intangible asset license agreement (the
Intangible Asset License Agreement) with MS Real Estate Management Company (MSRE), an entity
owned by Martha Stewart. The Intangible Asset License Agreement replaced the Location Rental
Agreement dated as of September 17, 2004, which expired on September 17, 2007, but which was
extended by letter agreement dated as of September 12, 2007 pending negotiation of the Intangible
Asset License Agreement. The Intangible Asset License Agreement is retroactive to September 18,
2007 and has a five-year term.
Pursuant to the Intangible Asset License Agreement, the Company pays an annual fee of $2.0
million to MSRE over the 5-year term for the perpetual, exclusive right to use Ms. Stewarts
lifestyle intangible asset in connection with Company products and services and during the term of
the agreement to access various real properties owned by Ms. Stewart. On February 8, 2010, the
Company executed an amendment to the Intangible Asset License Agreement. Pursuant to the amendment,
for 2010 only, the annual fee of $2.0 million that would otherwise be payable on or about September
15, 2010 was reduced to $1.95 million and is to be paid in two installments, the first of which was
$0.95 million and was paid on February 9, 2010. The remainder of the payment will be made on or
about September 15, 2010 as originally scheduled.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-looking Statements and Risk Factors
Except for historical information contained in this Quarterly Report, the statements in this
Quarterly Report are forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are not historical facts but
instead represent only our current beliefs regarding future events, many of which, by their nature,
are inherently uncertain and outside of our control. These statements often
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 the
following among others:
| adverse reactions to publicity relating to Martha Stewart or Emeril Lagasse by consumers, advertisers and business partners; | ||
| a loss of the services of Ms. Stewart or Mr. Lagasse; | ||
| a loss of the services of other key personnel; | ||
| a further softening of or increased competition in the domestic advertising market; | ||
| a failure by the economy to sustain any meaningful recovery, including particularly the housing market, and other developments that could continue to constrain consumers discretionary spending or affect the value of our assets or access to credit or other funds; | ||
| loss or failure of merchandising and licensing programs; | ||
| failure in acquiring or developing new brands or realizing the benefits of acquisition; | ||
| failure to replace Kmart revenues in the Merchandising segment; | ||
| failure to protect our intellectual property; | ||
| changes in consumer reading, purchasing, Internet and/or television viewing patterns; | ||
| increases in paper, postage or printing costs; | ||
| further weakening in circulation and increased costs of magazine distribution; | ||
| operational or financial problems at any of our contractual business partners; | ||
| the receptivity of consumers to our new product introductions; | ||
| failure to predict, respond to and influence trends in consumer taste, shifts in business strategies, inability to add to our partnerships or capitalize on existing partnerships; and | ||
| changes in government regulations affecting the Companys industries. |
These and other factors are discussed in the 2009 10-K under the heading Part I, Item 1A.
Risk Factors.
We caution you not to place undue reliance on any forward-looking statements, which speak only
as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise
any forward-looking statements contained in this Quarterly Report, whether as a result of new
information, future events or otherwise.
EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with inspiring
lifestyle content and programming, and well-designed, high-quality products. Our Company is
organized into four business segments with Publishing, Broadcasting and Internet representing our
media platforms that are complemented by our Merchandising segment. In the first quarter of 2010,
total revenues increased 6% from the same quarter in the prior year due primarily to the
recognition of an exclusive license fee of approximately $5.0 million from Hallmark Channel for a
significant portion of our library of programming. Revenues also increased due to higher
Merchandising segment revenue and higher advertising revenue in our Internet segment.
Our operating costs and expenses were lower in the first quarter of 2010 primarily due to a
one-time impairment charge of $7.1 million in our Merchandising segment in the prior-year period.
Our Publishing segment costs decreased due to lower circulation and compensation expenses. Our
Broadcasting segment benefited from lower television distribution and production costs. Corporate
expenses were also lower compared to the prior year primarily due to reduced severance and lower
facility-related costs.
We ended the quarter with $45.7 million in cash, cash equivalents and short-term investments.
Our overall liquidity increased from December 31, 2009 due to cash provided from operating and
investing activities, of which a portion was used to partially prepay the outstanding principal of
our term loan and for capital expenditures.
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Media Update. In the first quarter of 2010, revenues from our media platforms increased from the
prior-year period primarily due to the approximately $5.0 million license fee from Hallmark Channel
in our Broadcasting segment, as well as increased advertising revenue in our Internet segment. Our
Publishing segment was essentially flat, as advertising revenue from an extra issue of Martha
Stewart Weddings offset a decline in circulation revenue.
Publishing Segment
Publishing segment revenues were essentially flat in the first quarter of 2010 compared to the
same quarter in 2009, as increased advertising revenue was more than offset by lower circulation
revenue. Advertising revenues increased in the first quarter of 2010 from the same quarter of 2009
mostly due to the timing of the spring issue of Martha Stewart Weddings. Circulation revenues
declined because of a decrease in subscription revenues due to lower effective rates, the
discontinuation of the subscription-based Dr. Andrew Weils Self Healing newsletter and higher
agency commissions. Publishing benefited in the quarter from lower operating expenses compared to
the comparable quarter of the prior year, primarily due to lower circulation-related expenses as
well as lower compensation expenses.
Broadcasting Segment
Broadcasting segment revenues were higher in the first quarter of 2010 as compared to the
prior-year period due to the recognition of an exclusive license fee of approximately $5.0 million
from Hallmark Channel for a significant portion of our library of programming. The license fee was
partially offset by a decline in revenue at The Martha Stewart Show and lower radio revenue
compared to last year.
Internet Segment
Internet segment revenues increased in the first quarter of 2010 as compared to the same
quarter in 2009 driven by a 17% increase in advertising revenue. Our unique visitors increased, on
average, by 21% from the prior year quarter, according to comScore panel data.
Merchandising Update. In the first quarter of 2010, Merchandising segment revenues were higher due
to an increase in revenue from customers other than Kmart, with whom our relationship ended during
the first quarter of 2010. We also received an approximately $1.0 million one-time payment from a
Merchandising segment partner. Kmart had a negative $2.2 million impact on revenue in the quarter
compared to the prior year.
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Comparison of Three Months Ended March 31, 2010 to Three Months Ended March 31, 2009
PUBLISHING SEGMENT
Three Months Ended March 31, | Better / | |||||||||||
(in thousands) | 2010 | 2009 | (Worse) | |||||||||
(unaudited) | (unaudited) | |||||||||||
Publishing Segment Revenues |
||||||||||||
Advertising |
$ | 17,276 | $ | 15,549 | $ | 1,727 | ||||||
Circulation |
10,630 | 12,609 | (1,979 | ) | ||||||||
Books |
63 | 48 | 15 | |||||||||
Other |
282 | 155 | 127 | |||||||||
Total Publishing Segment Revenues |
28,251 | 28,361 | (110 | ) | ||||||||
Publishing Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
$ | 17,000 | $ | 16,448 | $ | (552 | ) | |||||
Selling and promotion |
11,096 | 11,890 | 794 | |||||||||
General and administrative |
1,198 | 1,821 | 623 | |||||||||
Depreciation and amortization |
51 | 74 | 23 | |||||||||
Total Publishing Segment Operating Costs and Expenses |
29,345 | 30,233 | 888 | |||||||||
Operating Loss |
$ | (1,094 | ) | $ | (1,872 | ) | $ | 778 | ||||
Publishing revenues were essentially flat for the three months ended March 31, 2010 from
the prior-year period. Advertising revenue increased $1.7 million primarily due to the timing of
the 2010 spring issue of Martha Stewart Weddings which was included in the first quarter of 2010
compared to the 2009 issue which was included in the second quarter of 2009. Pages increased in
Martha Stewart Living, Everyday Food and Body + Soul/Whole Living, but were offset by lower
advertising rates across all titles. Circulation revenue decreased $2.0 million due to lower
effective subscription rates per copy for Martha Stewart Living and Everyday Food and higher
related agency commissions, as well as the discontinuation of the subscription-based Dr. Andrew
Weils Self Healing newsletter. Circulation revenue for the first quarter of 2010 was also impacted
by an increase in newsstand revenue due to the timing of the 2010 spring issue of Martha Stewart
Weddings and higher unit sales of Body+Soul/Whole Living but was almost fully offset by lower unit
sales of our other publications.
Three months ended March 31, | Three Months ended March 31, | |||
Magazine Publication Schedule | 2010 | 2009 | ||
Martha Stewart Living
|
Three Issues | Three Issues | ||
Everyday Food
|
Three Issues | Three Issues | ||
Martha Stewart Weddings
|
One Issue | Zero | ||
Body + Soul/Whole Living
|
Two Issues | Two Issues |
Production, distribution and editorial expenses increased $0.6 million due to the timing of
the 2010 spring issue of Martha Stewart Weddings and higher art and editorial compensation and
story costs, partially offset by lower paper costs. Selling and promotion expenses decreased $0.8
million due to lower subscriber acquisitions and newsstand-related costs, lower advertising and
consumer marketing staff costs, the discontinuation of Dr. Andrew Weils Self Healing newsletter
and timing of other circulation expenses. These decreased selling and promotion expenses were
partially offset by the timing of marketing promotional costs and higher direct mail investment for
Martha Stewart Living. General and administrative expenses decreased $0.6 million largely due to
lower headcount and lower non-cash compensation.
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BROADCASTING SEGMENT
Three Months Ended March 31, | Better / | |||||||||||
(in thousands) | 2010 | 2009 | (Worse) | |||||||||
(unaudited) | (unaudited) | |||||||||||
Broadcasting Segment Revenues |
||||||||||||
Advertising |
$ | 4,750 | $ | 6,024 | $ | (1,274 | ) | |||||
Radio licensing |
875 | 1,875 | (1,000 | ) | ||||||||
Television licensing and other |
6,466 | 2,615 | 3,851 | |||||||||
Total Broadcasting Segment Revenues |
12,091 | 10,514 | 1,577 | |||||||||
Broadcasting Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
$ | 6,790 | $ | 7,630 | $ | 840 | ||||||
Selling and promotion |
706 | 622 | (84 | ) | ||||||||
General and administrative |
1,352 | 1,359 | 7 | |||||||||
Depreciation and amortization |
65 | 69 | 4 | |||||||||
Total Broadcasting Segment Operating Costs and Expenses |
8,913 | 9,680 | 767 | |||||||||
Operating Income |
$ | 3,178 | $ | 834 | $ | 2,344 | ||||||
Broadcasting revenues increased 15% for the three months ended March 31, 2010 from the
prior-year period. Advertising revenue decreased $1.3 million primarily due to the decline in
household ratings for The Martha Stewart Show, although this was partially offset by higher
television spot advertising rates. The decrease in advertising revenue was also partially offset by
an increase in the quantity of integrations at higher rates. Radio licensing revenue decreased $1.0
million as a result of our new agreement with Sirius XM, which provides for lower licensing fees
and an opportunity to replace a portion of such lower licensing fees through advertising sales.
Television licensing and other revenue increased $3.8 million due to the recognition of
substantially all of the exclusive license fee which represents approximately $5.0 million from
Hallmark Channel for a significant portion of our library of programming. The benefit of the
Hallmark license fee was partially offset by the absence of our TurboChef relationship and the
conclusion of certain Emeril Lagasse television programming, both of which contributed to licensing
and other revenues for the three months ended March 31, 2009.
Production, distribution and editorial expenses decreased $0.8 million due to lower
distribution fees and production cost savings related to season 5 of The Martha Stewart Show as
compared to the prior years season 4.
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INTERNET SEGMENT
Three Months Ended March 31, | Better / | |||||||||||
(in thousands) | 2010 | 2009 | (Worse) | |||||||||
(unaudited) | (unaudited) | |||||||||||
Internet Segment Revenues |
||||||||||||
Advertising |
$ | 3,003 | $ | 2,576 | $ | 427 | ||||||
Other |
82 | 46 | 36 | |||||||||
Total Internet Segment Revenues |
3,085 | 2,622 | 463 | |||||||||
Internet Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
$ | 1,961 | $ | 1,858 | $ | (103 | ) | |||||
Selling and promotion |
1,801 | 1,752 | (49 | ) | ||||||||
General and administrative |
408 | 592 | 184 | |||||||||
Depreciation and amortization |
384 | 452 | 68 | |||||||||
Total Internet Segment Operating Costs and Expenses |
4,554 | 4,654 | 100 | |||||||||
Operating Loss |
$ | (1,469 | ) | $ | (2,032 | ) | $ | 563 | ||||
Internet revenues increased 18% for the three months ended March 31, 2010 from the
prior-year period. Advertising revenue increased $0.4 million, or 17%, due to an increase in sold
advertising volume, despite lower rates.
Production, distribution and editorial costs increased $0.1 million due to increased headcount
and higher consulting costs as the result of upgrading our website. General and administrative
expenses decreased $0.2 million due to reduced headcount as compared to the prior-year period.
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MERCHANDISING SEGMENT
Three Months Ended March 31, | Better / | |||||||||||
(in thousands) | 2010 | 2009 | (Worse) | |||||||||
(unaudited) | (unaudited) | |||||||||||
Merchandising Segment Revenues |
||||||||||||
Royalty and other |
$ | 8,624 | $ | 5,558 | $ | 3,066 | ||||||
Kmart earned royalty |
114 | 2,436 | (2,322 | ) | ||||||||
Kmart minimum true-up |
1,071 | 939 | 132 | |||||||||
Total Merchandising Segment Revenues |
9,809 | 8,933 | 876 | |||||||||
Merchandising Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
$ | 1,778 | $ | 2,255 | $ | 477 | ||||||
Selling and promotion |
1,004 | 517 | (487 | ) | ||||||||
General and administrative |
1,691 | 819 | (872 | ) | ||||||||
Depreciation and amortization |
12 | 18 | 6 | |||||||||
Impairment on equity investment |
| 7,100 | 7,100 | |||||||||
Total Merchandising Segment Operating Costs and Expenses |
4,485 | 10,709 | 6,224 | |||||||||
Operating Income / (Loss) |
$ | 5,324 | $ | (1,776 | ) | $ | 7,100 | |||||
Merchandising revenues increased 10% for the three months ended March 31, 2010 from the
prior-year period. Royalty and other revenue increased $3.1 million partially due to the
contribution from our new merchandising relationships, a one-time $1.0 million payment received
from a manufacturing partner and higher rates and sales from certain of our existing partners. The
increase in royalty and other revenue is partially offset by the decrease of $2.2 million related
to our agreement with Kmart, which ended in January 2010. The pro-rata portion of revenues related
to the contractual minimum amounts from Kmart covering the three months ended March 31, 2010 and
2009 is listed separately above as Kmart minimum true-up.
Production, distribution and editorial expenses decreased $0.5 million due primarily to lower
allocated facilities costs, as compared to the prior-year period. The allocation policy for
facilities expenses changed in 2010 for the Merchandising segment only. All allocated rent and
facilities charges will now be reflected in the Merchandising segment as overhead costs in the
general and administrative expense category. This allocation change does not impact any of our
other business segments. Selling and promotion expenses increased $0.5 million primarily as a
result of services that we provide to our partners for reimbursable creative services projects.
General and administrative costs increased $0.9 million due to higher compensation expenses, higher
allocated facilities costs due to the change in policy described above and higher professional
fees. In the first quarter of 2009, we recorded non-cash impairment charges of $7.1 million related
to our cost-based equity investment in United Craft MS Brands, LLC.
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CORPORATE
Three Months Ended March 31, | Better / | |||||||||||
(in thousands) | 2010 | 2009 | (Worse) | |||||||||
(unaudited) | (unaudited) | |||||||||||
Corporate Operating Costs and Expenses |
||||||||||||
General and administrative |
$ | 8,698 | $ | 9,501 | $ | 803 | ||||||
Depreciation and amortization |
610 | 1,138 | 528 | |||||||||
Total Corporate Operating Costs and Expenses |
9,308 | 10,639 | 1,331 | |||||||||
Operating Loss |
$ | (9,308 | ) | $ | (10,639 | ) | $ | 1,331 | ||||
Corporate operating costs and expenses decreased 13% for the three months ended March 31,
2010 from the prior-year period. General and administrative expenses decreased $0.8 million
primarily due to prior-year period severance with no comparable expense in the three months ended
March 31, 2010. In addition, general and administrative expenses decreased due to lower rent
expense from the consolidation of certain offices and lower professional fees, although these were
partially offset by higher compensation expense. Depreciation and amortization expenses decreased
$0.5 million due to lower depreciation expense also related to the relocation of our office space.
OTHER ITEMS
Interest expense, net. Interest expense, net, was $0.1 million for the three months ended March
31, 2010 compared to interest expense, net, of $0.01 million for the prior-year period.
Loss on equity securities. Loss on equity securities was $(0.8) million for the three months ended
March 31, 2009. The first quarter 2009 expense was the result of marking certain assets to fair
value in accordance with accounting principles governing derivative instruments.
Other Loss. Other loss was $(0.2) million for the three months ended March 31, 2009 representing
our proportionate share of the results of our equity investments one quarter in arrears. This loss
represents our portion of the results of our equity investments for the quarter ended December 31,
2008.
Income tax expense. Income tax expense for the three months ended March 31, 2009 and 2010 was
$0.4 million.
Net Loss. Net loss was $(3.9) million for the three months ended March 31, 2010 compared to net
loss of $(16.8) million for the three months ended March 31, 2010, as a result of the factors
described above.
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Liquidity and Capital Resources
Overview
During the first quarter of 2010, our overall cash, cash equivalents and short-term
investments increased $7.2 million from December 31, 2009. The increase was due to the satisfaction
of our 2009 year-end receivable due from Kmart and other advertising receivables, as well as net
sales of short-term investments, partially offset by capital expenditures and a principal
pre-payment of our loan with Bank of America. Cash, cash equivalents and short-term investments
were $45.7 million and $38.5 million at March 31, 2010 and December 31, 2009, respectively.
We believe that our available cash balances and short-term investments will be sufficient to
meet our recurring cash needs for working capital and capital expenditures for 2010.
Cash Flows from Operating Activities
Our cash inflows from operating activities are generated by our business segments from
revenues, as described previously in the business segment discussions, which include cash from
advertising customers, licensing partners and magazine circulation sales. Operating cash outflows
generally include employee and related costs, the physical costs associated with producing
magazines and our television shows and the cash costs of facilities.
Cash provided by operating activities was $10.5 million and $2.5 million for the three months
ended March 31, 2010 and 2009, respectively. In the first quarter of 2010, cash from operations
increased primarily due to the satisfaction of the 2009 year-end receivable due from Kmart and
other advertising receivables. The increase in cash from operations was partially offset by our
operating loss, as discussed earlier, net of non-cash factors including the receivable related to
the recognition of substantially all of the exclusive license fee which represents approximately
$5.0 million from Hallmark Channel for a significant portion of our library of programming.
Cash Flows from Investing Activities
Our cash inflows from investing activities generally include proceeds from the sale of
short-term investments. Investing cash outflows generally include payments for the acquisition of
new businesses, short- and long-term investments and additions to property, plant, and equipment.
Cash provided by/(used in) investing activities was $1.7 million and $(1.5) million for the
three months ended March 31, 2010 and 2009, respectively. In the first quarter of 2010, cash flow
provided by investing activities reflected net sales of short-term investments of $3.5 million,
partially offset by $1.8 million of cash used for capital improvements primarily in conjunction
with our relocation and consolidation of certain offices.
Cash Flows from Financing Activities
Our cash inflows from financing activities generally include proceeds from the exercise of
stock options for our Class A Common Stock issued under our equity incentive plans. Cash outflows
from financing activities generally include principal repayment of outstanding debt and debt
issuance costs.
Cash flows used in financing activities were $1.5 million for each of the three months ended
March 31, 2010 and 2009. In the first quarter of 2010, we made $1.5 million in principal
pre-payments on our term loan with Bank of America.
Debt
We have a line of credit with Bank of America in the amount of $5.0 million, which is
generally used to secure outstanding letters of credit. The line was renewed as of June 30, 2009
for a one-year period. The renewal included certain substantive changes from the prior years
terms, including a covenant to maintain $5.0 million in liquidity, as defined in the credit
agreement and the reduction of the current ratio requirement from 1.5:1.0 to 1.25:1.0. We were
compliant with the debt covenants as of March 31, 2010. We had no outstanding borrowings under this
facility as of March 31, 2010 and had letters of credit of $2.8 million.
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In April 2008, we entered into a loan agreement with Bank of America in the amount of $30.0
million related to the acquisition of certain assets of Emeril Lagasse. The loan agreement requires
equal principal payments of $1.5
million and accrued interest to be paid quarterly for the duration of the loan term,
approximately 5 years. In the first quarter of 2010, we prepaid $1.5 million in principal
representing amounts due through March 31, 2011. Through that date, there are no principal payments
due.
The loan terms require us to be in compliance with certain financial covenants, failure with
which to comply would result in an event of default and would permit Bank of America to accelerate
and demand repayment of the loan in full. We were compliant with the debt covenants as of March 31,
2010. The interest rate is equal to a floating rate of 1-month LIBOR plus 2.85%.
Seasonality and Quarterly Fluctuations
Our businesses can experience fluctuations in quarterly performance. Our Publishing segment
results can vary from quarter to quarter due to publication schedules and seasonality of certain
types of advertising. Advertising revenue from our Broadcasting segment is highly dependent on
ratings which fluctuate throughout the television season following general viewer trends. Ratings
tend to be highest during the fourth quarter and lowest in the summer months. Certain aspects of
our business related to Emeril Lagasse also fluctuate based on production schedules since this
revenue is generally recognized when services are performed. In our Internet segment, advertising
revenue on marthastewart.com is tied to traffic among other key factors and is typically highest in
the fourth quarter of the year. Revenues from our Merchandising segment can vary significantly from
quarter to quarter due to new product launches and the seasonality and performance of certain
product lines. In addition, we have historically recognized the revenue resulting from the
difference between the minimum royalty amount under the Kmart contract and royalties paid on actual
sales in the fourth quarter of each year, when the amount was determined.
Off-Balance Sheet Arrangements
At March 31, 2010, we did not have any off-balance sheet arrangements as defined in Item
303(a)(4) of Regulation S-K that have had or are likely to have a material current or future effect
on our financial statements.
Critical Accounting Policies and Estimates
General
Our accounting policies are described in Note 1 to the Consolidated Financial Statements in
our 2009 10-K. As discussed in Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations in our 2009 10-K, we consider an accounting estimate to be
critical if it required assumptions to be made that were uncertain at the time the estimate was
made and changes in the estimate or different estimates could have a material effect on our results
of operations. These critical estimates include those related to revenue recognition, allowance for
doubtful accounts and sales returns, television production costs, valuation of long-lived assets,
goodwill and other intangible assets, income taxes, and non-cash equity compensation. We base our
estimates on historical experience, current developments and on various other assumptions that we
believe to be reasonable under these circumstances, the results of which form the basis for making
judgments about carrying values of assets and liabilities that cannot readily be determined from
other sources. There can be no assurance that actual results will not differ from those estimates.
Since the date of the 2009 10-K, there have been no changes to our critical accounting policies and
estimates except for two items, as follows:
Revenue Recognition
We participate in certain arrangements containing multiple deliverables. These arrangements
generally consist of custom-created advertising programs delivered on multiple media platforms, as
well as licensing programs which may also be supported by various promotional plans. Examples of
significant program deliverables include print advertising pages in our publications, commercial
spots and product integrations on our television and radio programs, and advertising impressions
delivered on our website. Arrangements that were executed prior to January 1, 2010 are accounted
for in accordance with the provisions of Accounting Standards Codification (ASC) Topic 605,
Revenue Recognition (ASC 605). Because we elected to early adopt, on a prospective basis,
Financial Accounting Standards Board (FASB) ASU No. 09-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)
(ASU 09-13), arrangements executed on or after January 1, 2010 are subject to the new
guidance. ASU 09-13 updates the existing multiple-element arrangement guidance currently in
ASC 605.
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The determination of units of accounting includes several criteria under both ASC 605 and ASU
09-13. Consistent with ASC 605, ASU 09-13 requires that we examine separate contracts with the same
entity or related parties that are entered into or near the same time to determine if the
arrangements should be considered a single arrangement in the determination of units of accounting.
While both ASC 605 and ASU 09-13 require that units delivered have standalone value to the
customer, ASU 09-13 modifies the separation criteria in determining units of accounting by
eliminating the requirement to obtain objective and reliable evidence of the fair value of
undelivered items. As a result of the elimination of this requirement, the Companys significant
program deliverables generally meet the separation criteria under ASU 09-13, whereas under ASC 605
they did not qualify as separate units of accounting.
For those arrangements accounted for under ASC 605, if we are unable to put forth objective
and reliable evidence of the fair value of each deliverable, then we account for the deliverables
as a combined unit of accounting rather than separate units of accounting. In this case, the
arrangement fee is recognized as revenue as the earnings process is completed, generally over the
fulfillment term of the last deliverable.
For those arrangements accounted for under ASU 09-13, we are required to allocate revenue
based on the relative selling price of each deliverable which qualifies as a unit of accounting,
even if such deliverables are not sold separately by us or other vendors. Determination of selling
price is a judgmental process which requires numerous assumptions. The consideration is allocated
at the inception of the arrangement to all deliverables based upon their relative selling prices.
Selling prices for deliverables that qualify as separate units of accounting are determined using a
hierarchy of: 1) vendor-specific objective evidence (VSOE), 2) third-party evidence, and 3) best
estimate of selling price. We are able to establish VSOE for certain of our contract deliverables,
however, in most instances we have allocated consideration based upon its best estimate of selling
price. We established VSOE of certain deliverables by demonstrating that a substantial majority of
the recent standalone sales of those deliverables are priced within a relatively narrow range. Our
best estimate of selling price is intended to represent the price at which it would sell the
deliverable if we were to sell the item regularly on a standalone basis. Our estimates consider
market conditions, such as competitor pricing pressures, as well as entity-specific factors that
are consistent with normal pricing practices, such as the recent history of the selling prices of
similar products when sold on a standalone basis, the impact of the cost of customization, the size
of the transaction, and other factors contemplated in negotiating the arrangement with the
customer. The arrangement fee is recognized as revenue as the earnings process is completed,
generally at the time each unit of accounting is fulfilled.
Non-Cash Equity Compensation
We currently have a stock incentive plan that permits us to grant various types of share-based
incentives to key employees, directors and consultants. The primary types of incentives that have
been granted under the plan have been restricted shares of common stock, performance-based
restricted stock units and stock options. Restricted shares are valued at the market value of
traded shares on the date of grant. Performance-based restricted stock unit awards are accrued as
compensation expense based on the probable outcome of the performance condition, consistent with
requirements of ASC 718. Stock options are valued using a Black-Scholes option pricing model. The
Black-Scholes option pricing model requires numerous assumptions, including expected volatility of
our stock price and expected life of the option.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to certain market risks as the result of our use of financial instruments, in
particular the potential market value loss arising from adverse changes in interest rates, as well
as from adverse changes in our publicly traded investment. We do not utilize financial instruments
for trading purposes.
Interest Rates
We are exposed to market rate risk due to changes in interest rates on our loan agreement with
Bank of America that we entered into on April 2, 2008 under which we borrowed $30.0 million to fund
a portion of the acquisition of certain assets of Emeril Lagasse. Interest rates applicable to
amounts outstanding under this facility are at variable rates based on the 1-month LIBOR rate plus
2.85%. A change in interest rates on this variable rate debt impacts the interest incurred and cash
flows but does not impact the fair value of the instrument. We had outstanding borrowings of $12.0
million on the term loan at March 31, 2010 at an average rate of 3.08% for the quarter. A one
percentage point increase in the interest rate would have increased interest expense by $0.03
million for the three months ended March 31, 2010.
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We also have exposure to market rate risk for changes in interest rates as those rates relate
to our investment
portfolio. The primary objective of our investment activities is to preserve principal while
at the same time maximizing yields without significantly increasing risk. To achieve this
objective, we invest our excess cash in debt instruments of the United States Government and its
agencies, in high-quality corporate issuers and, by internal policy, limit both the term and amount
of credit exposure to any one issuer. As of March 31, 2010, net unrealized gains and losses on
these investments were not material. Our future investment income may fluctuate due to changes in
interest rates, or we may suffer losses in principal if forced to sell securities that have
declined in market value due to changes in interest rates. A one percentage point decrease in
average interest rates would have decreased interest income by $0.02 million for the three months
ended March 31, 2010.
Stock Prices
We have a common stock investment in a publicly traded company that is subject to market price
volatility. This investment had an aggregate fair value of approximately $3.1 million as of March
31, 2010. A hypothetical decrease in the market price of this investment of 10% would result in a
fair value of approximately $2.8 million. The hypothetical decrease in fair value of $0.3 million
would be recorded in shareholders equity as other comprehensive loss, as any change in fair value
of our publicly-traded equity securities are not recognized on our statement of operations, unless
the loss is deemed other-than-temporary.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal
Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure
controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) required by Exchange Act Rules 13a-15(b) or
15d-15(b), as of the end of the period covered by this report. Based upon that evaluation, our
Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of that date to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange
Commission (SEC) rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by us in such reports is accumulated and communicated to our
management, including the Principal Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
Evaluation of Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our Principal
Executive Officer and Chief Financial Officer, we have determined that, during the first quarter of
fiscal 2010, there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to legal proceedings in the ordinary course of business, including
product liability claims for which we are indemnified by our licensees. None of these proceedings
is deemed material.
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ITEM 1A. RISK FACTORS.
There have been no material changes to the Companys risk factors as disclosed in the
2009 10-K, under the heading Part I, Item 1A, Risk Factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) | None. | |
(b) | None. | |
(c) | Issuer Purchases of Equity Securities |
The following table provides information about our purchases of our Class A Common Stock
during each month of the quarter ended March 31, 2010:
(a) | (b) | (c) | (d) | |||||||||||||
Maximum Number (or | ||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares (or Units) | Value) of Shares (or | |||||||||||||||
Total Number of | Purchased as Part of | Units) that may yet be | ||||||||||||||
Shares (or Units) | Average Price Paid | Publicly Announced | Purchased under the | |||||||||||||
Period | Purchased (1) | per Share (or Unit) | Plans or Programs | Plans or Programs | ||||||||||||
January 2010 |
6,892 | $ | 5.29 | Not applicable | Not applicable | |||||||||||
February 2010 |
5,508 | $ | 4.73 | Not applicable | Not applicable | |||||||||||
March 2010 |
18,443 | $ | 5.35 | Not applicable | Not applicable | |||||||||||
Total for quarter ended March 31, 2010 |
30,843 | $ | 5.12 | Not applicable | Not applicable | |||||||||||
(1) | Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our stock incentive plan allowing us to withhold, or the recipient to deliver to us, the number of shares of our Class A Common Stock having the fair value equal to tax withholding due. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
Exhibit | ||||
Number | Exhibit Title | |||
10.1 | Letter Agreement dated as of September 1, 2009 between Martha Stewart Living Omnimedia, Inc. and Peter Hurwitz |
|||
31.1 | Certification of Principal Executive Officer Pursuant to Section 308 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section 308 of the Sarbanes-Oxley Act of 2002 |
|||
32 | Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MARTHA STEWART LIVING OMNIMEDIA, INC. |
||||
Date: May 7, 2010 | /s/ Kelli Turner | |||
Name: | Kelli Turner | |||
Title: | Chief Financial Officer (Principal Financial Officer and duly authorized officer) |
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EXHIBIT INDEX
Exhibit | ||||
Number | Exhibit Title | |||
10.1 | Letter Agreement dated as of September 1, 2009 between Martha Stewart Living Omnimedia,
Inc. and Peter Hurwitz |
|||
31.1 | Certification of Principal Executive Officer Pursuant to Section 308 of the Sarbanes-Oxley
Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section 308 of the Sarbanes-Oxley Act
of 2002 |
|||
32 | Certification of Principal Executive Officer and Chief Financial Officer Pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002 |
27