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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
¨ | 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 x No ¨
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 ¨ No ¨
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 | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Class |
Outstanding as of November 1, 2010 |
|||
Class A, $0.01 par value |
28,641,547 | |||
Class B, $0.01 par value |
26,317,960 | |||
Total |
54,959,507 | |||
Table of Contents
Martha Stewart Living Omnimedia, Inc.
Page | ||||||||
Part I. | Financial Information | |||||||
Item 1. | Financial Statements. | 3 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. | 14 | ||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 28 | ||||||
Item 4. | Controls and Procedures. | 29 | ||||||
Part II. | Other Information | |||||||
Item 1. | Legal Proceedings. | 30 | ||||||
Item 1A. | Risk Factors. | 30 | ||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 30 | ||||||
Item 3. | Defaults Upon Senior Securities. | 30 | ||||||
Item 4. | Reserved | 30 | ||||||
Item 5. | Other Information. | 30 | ||||||
Item 6. | Exhibits. | 31 | ||||||
Signatures | 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)
September 30, 2010 |
December 31, 2009 |
|||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 27,238 | $ | 25,384 | ||||
Short-term investments |
14,167 | 13,085 | ||||||
Receivable sale of short-term investment |
1,001 | | ||||||
Accounts receivable, net |
39,705 | 56,364 | ||||||
Inventory |
5,285 | 5,166 | ||||||
Deferred television production costs |
6,162 | 3,788 | ||||||
Other current assets |
5,066 | 5,709 | ||||||
Total current assets |
98,624 | 109,496 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net |
14,767 | 17,268 | ||||||
GOODWILL, net |
45,107 | 45,107 | ||||||
OTHER INTANGIBLE ASSETS, net |
46,550 | 47,070 | ||||||
OTHER NONCURRENT ASSETS, net |
11,847 | 10,850 | ||||||
Total assets |
$ | 216,895 | $ | 229,791 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable and accrued liabilities |
$ | 26,728 | $ | 26,752 | ||||
Accrued payroll and related costs |
8,538 | 7,495 | ||||||
Current portion of deferred subscription revenue |
15,935 | 18,587 | ||||||
Current portion of other deferred revenue |
6,132 | 4,716 | ||||||
Current portion of loan payable |
1,500 | | ||||||
Total current liabilities |
58,833 | 57,550 | ||||||
DEFERRED SUBSCRIPTION REVENUE |
4,626 | 5,672 | ||||||
OTHER DEFERRED REVENUE |
1,803 | 2,759 | ||||||
LOAN PAYABLE |
9,000 | 13,500 | ||||||
DEFERRED INCOME TAX LIABILITY |
4,208 | 3,200 | ||||||
OTHER NONCURRENT LIABILITIES |
3,638 | 3,290 | ||||||
Total liabilities |
82,108 | 85,971 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Class A Common Stock, $.01 par value, 350,000 shares authorized; 28,433 and 28,313 shares outstanding in 2010 and 2009, respectively |
284 | 283 | ||||||
Class B Common Stock, $.01 par value, 150,000 shares authorized; 26,568 and 26,690 shares outstanding in 2010 and 2009, respectively |
266 | 267 | ||||||
Capital in excess of par value |
294,304 | 290,387 | ||||||
Accumulated deficit |
(160,305 | ) | (146,605 | ) | ||||
Accumulated other comprehensive income |
1,013 | 263 | ||||||
135,562 | 144,595 | |||||||
Less: Class A Treasury Stock 59 shares at cost |
(775 | ) | (775 | ) | ||||
Total shareholders equity |
134,787 | 143,820 | ||||||
Total liabilities and shareholders equity |
$ | 216,895 | $ | 229,791 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
REVENUES |
||||||||||||||||
Publishing |
$ | 30,038 | $ | 27,053 | $ | 88,901 | $ | 88,938 | ||||||||
Broadcasting |
5,795 | 11,036 | 26,076 | 31,859 | ||||||||||||
Internet |
4,280 | 2,761 | 12,044 | 9,543 | ||||||||||||
Merchandising |
9,575 | 8,931 | 31,200 | 26,867 | ||||||||||||
Total revenues |
49,688 | 49,781 | 158,221 | 157,207 | ||||||||||||
OPERATING COSTS AND EXPENSES |
||||||||||||||||
Production, distribution and editorial |
29,184 | 29,732 | 85,837 | 87,212 | ||||||||||||
Selling and promotion |
14,803 | 13,232 | 42,889 | 41,569 | ||||||||||||
General and administrative |
11,982 | 16,402 | 37,887 | 43,100 | ||||||||||||
Depreciation and amortization |
1,627 | 2,096 | 3,689 | 5,994 | ||||||||||||
Impairment charge |
| | | 12,600 | ||||||||||||
Total operating costs and expenses |
57,596 | 61,462 | 170,302 | 190,475 | ||||||||||||
OPERATING LOSS |
(7,908 | ) | (11,681 | ) | (12,081 | ) | (33,268 | ) | ||||||||
OTHER (EXPENSE) / INCOME |
||||||||||||||||
Interest income / (expense), net |
46 | (1 | ) | (62 | ) | (91 | ) | |||||||||
Loss on sale of fixed asset |
(647 | ) | | (647 | ) | | ||||||||||
Gain on sale of short-term investments |
403 | | 403 | 330 | ||||||||||||
Loss on equity securities |
(5 | ) | | (24 | ) | (877 | ) | |||||||||
Other loss |
| | | (236 | ) | |||||||||||
Total other expense |
(203 | ) | (1 | ) | (330 | ) | (874 | ) | ||||||||
LOSS BEFORE INCOME TAXES |
(8,111 | ) | (11,682 | ) | (12,411 | ) | (34,142 | ) | ||||||||
Income tax provision |
(475 | ) | (432 | ) | (1,289 | ) | (1,190 | ) | ||||||||
NET LOSS |
$ | (8,586 | ) | $ | (12,114 | ) | $ | (13,700 | ) | $ | (35,332 | ) | ||||
LOSS PER SHARE BASIC AND DILUTED |
||||||||||||||||
Net Loss |
$ | (0.16 | ) | $ | (0.22 | ) | $ | (.25 | ) | $ | (0.66 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
||||||||||||||||
Basic and diluted |
54,487 | 53,865 | 54,416 | 53,817 |
The accompanying notes are an integral part of these consolidated financial statements.
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MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders Equity
For the Nine Months Ended September 30, 2010
(unaudited, in thousands)
Class A Common Stock |
Class B Common Stock |
Capital in
excess of par value |
Accumulated deficit |
Accumulated other comprehensive income |
Class
A Treasury Stock |
|||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | 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 |
| | | | | (13,700 | ) | | | | (13,700 | ) | ||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Realized gain on sale of short-term investment |
| | | | | | (403 | ) | | | (403 | ) | ||||||||||||||||||||||||||||
Unrealized gain on short-term investment |
| | | | | | 1,153 | | | 1,153 | ||||||||||||||||||||||||||||||
Total comprehensive loss |
(12,950 | ) | ||||||||||||||||||||||||||||||||||||||
Conversion of shares |
122 | 1 | (122 | ) | (1 | ) | | | | | | | ||||||||||||||||||||||||||||
Issuance of shares of stock in conjunction with stock option exercises |
33 | | | | 81 | | | | | 81 | ||||||||||||||||||||||||||||||
Issuance of shares of stock and restricted stock, net of cancellations and tax withholdings |
(35 | ) | | | | (306 | ) | | | | | (306 | ) | |||||||||||||||||||||||||||
Non-cash equity compensation |
| | | | 4,142 | | | | | 4,142 | ||||||||||||||||||||||||||||||
Balance at September 30, 2010 |
28,433 | $ | 284 | 26,568 | $ | 266 | $ | 294,304 | $ | (160,305 | ) | $ | 1,013 | (59 | ) | $ | (775 | ) | $ | 134,787 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (13,700 | ) | $ | (35,332 | ) | ||
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities: |
||||||||
Non-cash revenue |
(5,060 | ) | (370 | ) | ||||
Depreciation and amortization |
3,689 | 5,994 | ||||||
Amortization of deferred television production costs |
15,439 | 14,359 | ||||||
Impairment of cost-based investment |
| 12,600 | ||||||
Non-cash equity compensation |
4,175 | 6,869 | ||||||
Deferred income tax expense |
1,008 | 991 | ||||||
Loss on equity securities |
24 | 877 | ||||||
Gain on sale of short-term investment |
(403 | ) | (330 | ) | ||||
Loss on sale of fixed assets |
647 | | ||||||
Other non-cash charges, net |
493 | 590 | ||||||
Changes in operating assets and liabilities |
651 | (8,196 | ) | |||||
Net cash provided by / (used in) operating activities |
6,963 | (1,948 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Investment in other noncurrent assets |
| (828 | ) | |||||
Capital expenditures |
(4,156 | ) | (6,790 | ) | ||||
Proceeds from the sale of fixed assets |
1,403 | | ||||||
Purchases of short-term investments |
(14,282 | ) | (13,926 | ) | ||||
Sales of short-term investments |
14,845 | 14,649 | ||||||
Net cash used in investing activities |
(2,190 | ) | (6,895 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayment of long-term debt |
(3,000 | ) | (4,500 | ) | ||||
Proceeds received from stock option exercises |
81 | 70 | ||||||
Change in restricted cash |
| (15,000 | ) | |||||
Net cash used in financing activities |
(2,919 | ) | (19,430 | ) | ||||
Net increase / (decrease) in cash |
1,854 | (28,273 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
25,384 | 50,204 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 27,238 | $ | 21,931 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Martha Stewart Living Omnimedia, Inc.
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 unaudited consolidated financial statements 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 Accounting Standards Update (ASU) 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 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 the Company has elected to early adopt, on a prospective basis, ASU No. 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.
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
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Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements(Continued)
(unaudited)
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 replaced the then-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 was 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 ASU 09-17 is to bring SFAS 167 (as discussed above) into the ASC by amending ASC 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 September 30, 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 September 30, 2010, the Companys investments in the entities were substantially equal to 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.
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.
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Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements(Continued)
(unaudited)
3. 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:
September 30, 2010 | ||||||||||||||||
(in thousands) |
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value Measurements |
||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | 455 | $ | | $ | | $ | 455 | ||||||||
Short-term investments: |
||||||||||||||||
Marketable equity securities |
3,273 | | | 3,273 | ||||||||||||
U.S. government and agency securities |
| 1,429 | | 1,429 | ||||||||||||
Corporate obligations |
| 6,630 | | 6,630 | ||||||||||||
Other fixed income securities |
| 2,499 | | 2,499 | ||||||||||||
International securities |
| 336 | | 336 | ||||||||||||
Total |
$ | 3,728 | $ | 10,894 | $ | | $ | 14,622 | ||||||||
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Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements(Continued)
(unaudited)
December 31, 2009 | ||||||||||||||||
(in thousands) |
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value 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 |
$ | 3,364 | $ | 10,948 | $ | | $ | 14,312 | ||||||||
Marketable Equity Securities
The cost basis of the marketable equity securities at September 30, 2010 was $2.2 million and the Company recognized $1.1 million through September 30, 2010 in cumulative unrealized gains included in other comprehensive income.
During the third quarter of 2010, the Company sold a portion of its marketable equity securities for a gain of $0.4 million.
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 are recorded at fair value only when an impairment charge is recognized. Such impairment charges incorporate fair value measurements based on level 3 inputs.
4. Inventory
Inventory is comprised of paper stock. The inventory balances at September 30, 2010 and December 31, 2009 were $5.3 million and $5.2 million, respectively.
5. 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, 2010 for a one-year period. There were no substantive changes from the prior years terms. The Company was compliant with the debt covenants as of September 30, 2010. The Company had no outstanding borrowings under this facility as of September 30, 2010 and had letters of credit outstanding of $2.6 million.
In April 2008, the Company entered into a loan agreement with Bank of America for a term loan 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. As of September 30, 2010, the Company has paid $19.5 million in principal, including prepayment of the $4.5 million due through
June 30, 2011. Accordingly, only one principal payment of $1.5 million due as of September 30, 2011 is reflected as a current liability in the consolidated balance sheet as of September 30, 2010. The interest rate on all outstanding amounts is equal to a floating rate of 1-month London Interbank Offered Rate (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 September 30, 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.
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Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements(Continued)
(unaudited)
6. 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 $5.8 million to its valuation allowance in the first nine months ended September 30, 2010, resulting in a cumulative balance of $79.0 million as of September 30, 2010. In addition, the Company has recorded $1.3 million of tax expense during the nine months ended September 30, 2010 which is primarily attributable to differences between the financial statement carrying amounts of past acquisitions of certain indefinite-lived intangible assets and their respective tax bases, which resulted in a net deferred tax liability of $4.2 million at September 30, 2010. 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 September 30, 2010, the Company had an ASC 740 liability balance of $0.3 million, of which $0.2 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate, and $0.1 million represented 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.
7. 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 of Class A Common Stock 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.
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 performance-based restricted stock units issued on March 2, 2009.
Consistent with requirements of ASC Topic 718, Compensation Stock Compensation, accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition. During the third quarter of 2010 the Company determined it was not probable that the performance conditions associated with the 2010 and 2009 performance-based restricted stock unit awards would be achieved. Accordingly, non-cash equity compensation expense of approximately $0.6 million was reversed in the quarter.
No other material awards or modifications to awards were made in the nine months ended September 30, 2010.
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Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements(Continued)
(unaudited)
8. 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 marketable equity securities. Total comprehensive loss for the three months ended September 30, 2010 and 2009 was $8.4 million and $11.7 million, respectively. Total comprehensive loss for the nine months ended September 30, 2010 and 2009, was $13.0 million and $34.7 million, respectively.
9. 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.
Certain prior year financial information has been reclassified to conform to the 2010 financial statement presentation.
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 predominantly 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 seasons 4 and 5 aired in syndication over a 12-month period beginning and ending in the middle of September. The new season 6 of The Martha Stewart Show currently airs on the Hallmark channel also 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 September 30, 2010 and 2009 is as follows:
(in thousands) |
Publishing | Broadcasting | Internet | Merchandising | Corporate | Consolidated | ||||||||||||||||||
2010 |
||||||||||||||||||||||||
Revenues |
$ | 30,038 | $ | 5,795 | $ | 4,280 | $ | 9,575 | | $ | 49,688 | |||||||||||||
Non-cash equity compensation |
33 | 3 | (15 | ) | (50 | ) | 734 | 705 | ||||||||||||||||
Depreciation and amortization |
69 | 612 | 184 | 13 | 749 | 1,627 | ||||||||||||||||||
Operating (loss) / income |
(368 | ) | (4,074 | ) | (745 | ) | 5,501 | (8,222 | ) | (7,908 | ) | |||||||||||||
2009 |
||||||||||||||||||||||||
Revenues |
$ | 27,053 | $ | 11,036 | $ | 2,761 | $ | 8,931 | $ | | $ | 49,781 | ||||||||||||
Non-cash equity compensation |
967 | 437 | 163 | 714 | 1,727 | 4,008 | ||||||||||||||||||
Depreciation and amortization |
56 | 699 | 492 | 14 | 835 | 2,096 | ||||||||||||||||||
Operating (loss) / income |
(2,480 | ) | 757 | (2,070 | ) | 3,524 | (11,412 | ) | (11,681 | ) |
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Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements(Continued)
(unaudited)
Segment information for the nine months ended September 30, 2010 and 2009 is as follows:
(in thousands) |
Publishing | Broadcasting | Internet | Merchandising | Corporate | Consolidated | ||||||||||||||||||
2010 |
||||||||||||||||||||||||
Revenues |
$ | 88,901 | $ | 26,076 | $ | 12,044 | $ | 31,200 | | $ | 158,221 | |||||||||||||
Non-cash equity compensation |
465 | 217 | 17 | 635 | 2,841 | 4,175 | ||||||||||||||||||
Depreciation and amortization |
169 | 748 | 753 | 35 | 1,984 | 3,689 | ||||||||||||||||||
Operating (loss) / income |
631 | (2,354 | ) | (2,420 | ) | 18,154 | (26,092 | ) | (12,081 | ) | ||||||||||||||
2009 |
||||||||||||||||||||||||
Revenues |
$ | 88,938 | $ | 31,859 | $ | 9,543 | $ | 26,867 | $ | | $ | 157,207 | ||||||||||||
Non-cash equity compensation |
1,219 | 700 | 234 | 1,123 | 3,593 | 6,869 | ||||||||||||||||||
Depreciation and amortization |
186 | 837 | 1,461 | 49 | 3,461 | 5,994 | ||||||||||||||||||
Impairment charge |
| | | 12,600 | | 12,600 | ||||||||||||||||||
Operating (loss) / income |
(1,356 | ) | 3,269 | (4,574 | ) | 1,058 | (31,665 | ) | (33,268 | ) |
The Company announced on October 27, 2010 that, as a result of its efforts to further streamline and improve efficiencies in the Companys print and digital operations, which included restructuring the Companys advertising sales and marketing departments, the Company plans to report the results of operations from its Publishing and Internet segments as a consolidated segment titled Publishing.
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 was to be paid in two installments, the first of which was $0.95 million and was paid in February 2010. The remainder of the payment was made during September 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 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 limit 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; |
| inability to attract anticipated levels of viewers to our new programming on Hallmark Channel; |
| 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 or the termination of such partnerships; and |
| changes in government regulations affecting the Companys industries. |
These and other factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (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 has been organized into four business segments with Publishing, Broadcasting and Internet representing our media platforms that are complemented by our Merchandising segment. We announced on October 27, 2010 that, as a result of our efforts to further streamline and improve efficiencies in our print and digital operations, which included restructuring our advertising sales and marketing departments, we plan to report the results of operations from our Publishing and Internet segments as a consolidated segment titled Publishing.
In the third quarter of 2010, total revenues were approximately flat with the same quarter in the prior year. Revenues in our Publishing segment increased in the third quarter compared to the prior-year period due primarily to the timing of the fall issue of Martha Stewart Weddings, which was included in the third quarter of 2010, but the fourth quarter of 2009. In addition, Internet segment and Merchandising segment revenues increased compared to the prior year. Offsetting these increases in revenues was a decline in Broadcasting segment revenues primarily due to the absence of revenue from our TurboChef relationship which contributed to revenues in the third quarter of 2009.
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Effective with our January 2011 issues of Martha Stewart Living, Everyday Food and Whole Living, we expect to increase our rate bases as follows: Martha Stewart Living rate base to 2.050 million up from 2.025 million in 2010; Everyday Food rate base to 1.025 million up from 1.0 million in 2010; and Whole Living rate base to 700,000 up from 650,000.
Our operating costs and expenses were lower in the third quarter of 2010 compared to the third quarter of 2009. The decline was largely due to lower cash and non-cash bonus accruals as the third quarter of 2009 included a catch-up bonus accrual. In the fourth quarter of 2010, we expect a severance charge to our Corporate segment of less than $1 million related to the recent restructuring of our advertising sales and marketing department.
Media Update. In the third quarter of 2010, revenues from our media platforms decreased from the prior-year period primarily due to reduced revenues in our Broadcasting segment, which was negatively impacted by the absence of TurboChef in this years quarter, lower revenue at The Martha Stewart Show in syndication, lower revenue associated with Whatever Martha! and lower guaranteed radio licensing revenue. The decline in the Broadcasting segment was partially offset by increased revenues from our Publishing segment, which benefited from the timing of the fall issue of Martha Stewart Weddings, as well as increased revenues from our Internet segment. The increase in Internet segment revenues in the third quarter of 2010 as compared to the same quarter in 2009 was driven by a 56% increase in advertising revenue. Our unique visitors increased, on average, by 31% from the prior year quarter, according to comScore panel data.
Merchandising Update. In the third quarter of 2010, Merchandising segment revenues were higher due to an increase in revenue from customers other than Kmart, with which our relationship ended during the first quarter of 2010.
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Comparison of Three Months Ended September 30, 2010 to Three Months Ended September 30, 2009
PUBLISHING SEGMENT
(in thousands) |
Three Months Ended September 30, |
|||||||||||
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
||||||||||
Publishing Segment Revenues |
||||||||||||
Advertising |
$ | 17,799 | $ | 15,615 | $ | 2,184 | ||||||
Circulation |
11,817 | 11,027 | 790 | |||||||||
Books |
189 | 92 | 97 | |||||||||
Licensing and other |
233 | 319 | (86 | ) | ||||||||
Total Publishing Segment Revenues |
30,038 | 27,053 | 2,985 | |||||||||
Publishing Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
18,095 | 18,091 | (4 | ) | ||||||||
Selling and promotion |
10,962 | 9,653 | (1,309 | ) | ||||||||
General and administrative |
1,280 | 1,733 | 453 | |||||||||
Depreciation and amortization |
69 | 56 | (13 | ) | ||||||||
Total Publishing Segment Operating Costs and Expenses |
30,406 | 29,533 | (873 | ) | ||||||||
Operating Loss |
$ | (368 | ) | $ | (2,480 | ) | $ | 2,112 | ||||
Publishing revenues increased 11% for the three months ended September 30, 2010 from the prior-year period. Advertising revenue increased $2.2 million primarily due to the timing of the 2010 fall issue of Martha Stewart Weddings which was included in the third quarter of 2010 compared to the 2009 issue which was included in the fourth quarter of 2009. Advertising pages increased in Martha Stewart Living but the revenue contribution was mostly offset by lower advertising overall in Whole Living, lower advertising rates in Martha Stewart Living and fewer advertising pages in Everyday Food. Circulation revenue increased $0.8 million largely due to higher newsstand revenue as the result of the timing of the 2010 fall issue of Martha Stewart Weddings, as well as higher unit sales of Martha Stewart Living, Whole Living and the Halloween special, and lower agency commissions for Whole Living. These increases in circulation revenue were partially offset by the discontinuation of the subscription-based Dr. Andrew Weils Self Healing newsletter and lower effective subscription rates per copy for Martha Stewart Living and Everyday Food.
Magazine Publication Schedule |
Three months ended September 30, 2010 |
Three Months ended September 30, 2009 | ||
Martha Stewart Living |
Three Issues | Three Issues | ||
Everyday Food |
Two Issues | Two Issues | ||
Martha Stewart Weddings |
One Issue | No Issues | ||
Whole Living (formerly Body + Soul) |
Two Issues | Two Issues | ||
Dr. Andrew Weils Self-Healing |
No Issues | Three Issues | ||
Special Interest Publications |
One Issue | One Issue |
Production, distribution and editorial expenses were flat for the three months ended September 30, 2010 compared to the prior-year period. Certain production, distribution and editorial expenses increased due to the timing of the 2010 fall issue of Martha Stewart Weddings and higher art and editorial compensation and story costs that were partially related to an upcoming Martha Stewart Living digital initiative. These increases in production, distribution and editorial expenses were fully offset by lower cash and non-cash bonus accruals substantially reflecting the inclusion in the prior-year period of a catch-up bonus accrual. Selling and promotion expenses increased $1.3 million due to higher direct mail investment for Martha Stewart Living, the timing of marketing promotional costs and higher commission expense, partially offset by the lower cash and non-cash bonus accruals in the third quarter of 2010. General and administrative expenses decreased $0.5 million largely due to lower headcount and lower facilities-related charges.
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BROADCASTING SEGMENT
(in thousands) |
Three Months Ended September 30, |
|||||||||||
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
||||||||||
Broadcasting Segment Revenues |
||||||||||||
Advertising |
$ | 4,131 | $ | 4,372 | $ | (241 | ) | |||||
Radio Licensing |
875 | 1,875 | (1,000 | ) | ||||||||
Licensing and other |
789 | 4,789 | (4,000 | ) | ||||||||
Total Broadcasting Segment Revenues |
5,795 | 11,036 | (5,241 | ) | ||||||||
Broadcasting Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
6,839 | 6,772 | (67 | ) | ||||||||
Selling and promotion |
853 | 1,031 | 178 | |||||||||
General and administrative |
1,565 | 1,777 | 212 | |||||||||
Depreciation and amortization |
612 | 699 | 87 | |||||||||
Total Broadcasting Segment Operating Costs and Expenses |
9,869 | 10,279 | 410 | |||||||||
Operating (Loss) / Income |
$ | (4,074 | ) | $ | 757 | $ | (4,831 | ) | ||||
Broadcasting revenues decreased 47% for the three months ended September 30, 2010 from the prior-year period. Advertising revenue decreased $0.2 million largely due to the decline in household ratings and lower advertising rates for season 5 of The Martha Stewart Show in syndication compared with season 4. The decrease in television advertising revenue was mostly offset by an increase in television integrations and the inclusion of advertising revenue from our new radio agreement with Sirius XM, which provides for lower licensing fees than our previous agreement, but also provides an opportunity to replace a portion of the licensing fees through advertising sales. However, as a result of the lower licensing fees in the new radio agreement, radio licensing revenue decreased $1.0 million. Television licensing and other revenue decreased $4.0 million mostly due to the absence of revenue from our TurboChef relationship, which contributed revenues to the third quarter of 2009, as well as the timing of revenues related to Whatever, Martha! which was delivered in the third quarter of 2009 and is expected to be delivered in the fourth quarter of 2010. In addition, licensing and other revenue declined due to lower licensing revenues related to Emeril Lagasses television programming and the timing of our international license renewals.
General and administrative expenses decreased $0.2 million due to lower cash and non-cash bonus accruals, mostly reflecting the inclusion in the prior-year period of a catch-up bonus accrual.
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INTERNET SEGMENT
(in thousands) |
Three Months
Ended September 30, |
|||||||||||
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
||||||||||
Internet Segment Revenues |
||||||||||||
Advertising |
$ | 4,260 | $ | 2,735 | $ | 1,525 | ||||||
Other |
20 | 26 | (6 | ) | ||||||||
Total Internet Segment Revenues |
4,280 | 2,761 | 1,519 | |||||||||
Internet Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
2,292 | 2,166 | (126 | ) | ||||||||
Selling and promotion |
2,173 | 1,787 | (386 | ) | ||||||||
General and administrative |
376 | 386 | 10 | |||||||||
Depreciation and amortization |
184 | 492 | 308 | |||||||||
Total Internet Segment Operating Costs and Expenses |
5,025 | 4,831 | (194 | ) | ||||||||
Operating Loss |
$ | (745 | ) | $ | (2,070 | ) | $ | 1,325 | ||||
Internet revenues increased 55% for the three months ended September 30, 2010 from the prior-year period. Advertising revenue increased $1.5 million due to an increase in sold advertising volume, as well as higher overall rates.
Production, distribution and editorial costs increased $0.1 million from the prior-year period due to higher compensation costs from increased headcount, partially offset by lower cash and non-cash bonus accruals mostly reflecting the inclusion in the prior-year period of a catch-up bonus accrual. Selling and promotion expenses increased $0.4 million due to additional website infrastructure investment, higher consumer marketing costs and higher commissions. Depreciation and amortization expenses decreased $0.3 million primarily due to the full depreciation by the second quarter of 2010 of the costs associated with the 2007 launch of our redesigned website.
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MERCHANDISING SEGMENT
(in thousands) |
Three Months Ended September 30, |
|||||||||||
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
||||||||||
Merchandising Segment Revenues |
||||||||||||
Royalty and other |
$ | 9,575 | $ | 7,373 | $ | 2,202 | ||||||
Kmart earned royalty |
| 1,558 | (1,558 | ) | ||||||||
Total Merchandising Segment Revenues |
9,575 | 8,931 | 644 | |||||||||
Merchandising Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
1,958 | 2,703 | 745 | |||||||||
Selling and promotion |
815 | 761 | (54 | ) | ||||||||
General and administrative |
1,288 | 1,929 | 641 | |||||||||
Depreciation and amortization |
13 | 14 | 1 | |||||||||
Total Merchandising Segment Operating Costs and Expenses |
4,074 | 5,407 | 1,333 | |||||||||
Operating Income |
$ | 5,501 | $ | 3,524 | $ | 1,977 | ||||||
Merchandising revenues increased 7% for the three months ended September 30, 2010 from the prior-year period. Royalty and other revenue increased $2.2 million due to the contributions from our new merchandising relationships and higher royalty rates and sales volume from certain of our existing partners. These increases in royalty and other revenue were partially offset by the absence of revenue from our TurboChef and 1-800-Flowers.com relationships, which both contributed revenues to the third quarter of 2009. In addition, the prior-year period included $1.6 million of revenues related to our agreement with Kmart, which ended in January 2010.
Production, distribution and editorial expenses decreased $0.7 million due to lower cash and non-cash bonus accruals mostly reflecting the inclusion in the prior-year period of catch-up bonus accrual, as well as lower allocated facilities costs. The allocation policy for facilities expenses changed in 2010 for the Merchandising segment only. All allocated rent and facilities charges are now reflected as overhead costs in the general and administrative expense category in the Merchandising segment instead of allocated throughout the various expense categories. This allocation change does not impact any of our other business segments. General and administrative costs decreased $0.6 million primarily due to lower cash and non-cash bonus accruals, partially offset by higher allocated facilities costs due to the change in policy described above.
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CORPORATE
(in thousands) |
Three Months Ended September 30, |
|||||||||||
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
||||||||||
Corporate Operating Costs and Expenses |
||||||||||||
General and administrative |
$ | 7,473 | $ | 10,577 | $ | 3,104 | ||||||
Depreciation and amortization |
749 | 835 | 86 | |||||||||
Total Corporate Operating Costs and Expenses |
8,222 | 11,412 | 3,190 | |||||||||
Operating Loss |
$ | (8,222 | ) | $ | (11,412 | ) | $ | 3,190 | ||||
Corporate operating costs and expenses decreased 28% for the three months ended September 30, 2010 from the prior-year period. General and administrative expenses decreased $3.1 million due to lower cash and non-cash bonus accruals mostly reflecting the inclusion in the prior-year period of a catch-up bonus accrual, as well as lower rent expense from the consolidation of certain offices.
OTHER ITEMS
Interest income / (expense), net. Interest income, net, was $0.05 million for the three months ended September 30, 2010 compared to interest expense, net, of $(0.0) million for the prior-year period.
Loss on sale of fixed asset. Loss on the sale of a fixed asset was $0.6 million for the three months ended September 30, 2010 with no comparable loss in the prior-year period.
Gain on sale of short-term investments. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $0.4 million for the three months ended September 30, 2010 with no comparable gain in the prior-year period.
Loss on equity securities. Loss on equity securities was $0.01 million for the three months ended September 30, 2010 with no comparable loss in the prior-year period. The losses were the result of marking certain assets to fair value in accordance with accounting principles governing derivative instruments.
Income tax expense. Income tax expense for the three months ended September 30, 2010 was $0.5 million, compared to a $0.4 million in the prior-year period.
Net loss. Net loss was $8.6 million for the three months ended September 30, 2010 compared to net loss of $12.1 million for the three months ended September 30, 2009, as a result of the factors described above.
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Comparison of Nine Months Ended September 30, 2010 to Nine Months Ended September 30, 2009
PUBLISHING SEGMENT
Nine Months Ended September 30, |
||||||||||||
(in thousands) |
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
|||||||||
Publishing Segment Revenues |
||||||||||||
Advertising |
$ | 53,550 | $ | 50,652 | $ | 2,898 | ||||||
Circulation |
33,611 | 36,680 | (3,069 | ) | ||||||||
Books |
1,036 | 875 | 161 | |||||||||
Licensing and other |
704 | 731 | (27 | ) | ||||||||
Total Publishing Segment Revenues |
88,901 | 88,938 | (37 | ) | ||||||||
Publishing Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
53,017 | 53,081 | 64 | |||||||||
Selling and promotion |
31,387 | 32,012 | 625 | |||||||||
General and administrative |
3,697 | 5,015 | 1,318 | |||||||||
Depreciation and amortization |
169 | 186 | 17 | |||||||||
Total Publishing Segment Operating Costs and Expenses |
88,270 | 90,294 | 2,024 | |||||||||
Operating Income / (Loss) |
$ | 631 | $ | (1,356 | ) | $ | 1,987 | |||||
Publishing revenues were essentially flat for the nine months ended September 30, 2010 compared to the prior-year period. Advertising revenue increased $2.9 million primarily due to the timing of the 2010 fall issue of Martha Stewart Weddings which was included in the third quarter of 2010 compared to the 2009 issue which was included in the fourth quarter of 2009. Advertising pages increased in Martha Stewart Living, Whole Living and Martha Stewart Weddings, but the revenue contribution was partially offset by lower advertising rates across all magazines. Circulation revenue decreased $3.1 million largely 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 nine months of 2010 was also impacted by lower unit sales of Martha Stewart Living and Everyday Food and the discontinuation of the newsstand-based Weil special interest publication, partially offset by the timing of the 2010 fall issue of Martha Stewart Weddings and an increase in unit sales of Whole Living.
Magazine Publication Schedule |
Nine Months ended September 30, 2010 |
Nine Months ended September 30, 2009 | ||
Martha Stewart Living |
Nine Issues | Nine Issues | ||
Everyday Food |
Eight Issues | Eight Issues | ||
Martha Stewart Weddings |
Three Issues | Two Issues | ||
Whole Living (formerly Body + Soul) |
Seven Issues | Seven Issues | ||
Dr. Andrew Weils Self Healing |
No Issues | Nine Issues | ||
Special Interest Publications |
One Issue | Two Issues |
Production, distribution and editorial expenses decreased $0.1 million largely due to lower paper costs and lower cash and non-cash bonus accruals, partially offset by higher art and editorial compensation and story costs. Selling and promotion expenses decreased $0.6 million due to lower newsstand-related costs, the discontinuation of Dr. Andrew Weils Self Healing newsletter and special interest publications and lower advertising and consumer marketing staff costs including lower cash and non-cash bonus accruals. These decreases in selling and promotion expenses were partially offset by higher direct mail investment for Martha Stewart Living and the timing of marketing promotional costs. General and administrative expenses decreased $1.3 million largely due to lower headcount and lower facilities-related charges.
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BROADCASTING SEGMENT
(in thousands) |
Nine Months Ended September 30, |
|||||||||||
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
||||||||||
Broadcasting Segment Revenues |
||||||||||||
Advertising |
$ | 14,972 | $ | 16,453 | $ | (1,481 | ) | |||||
Radio Licensing |
2,625 | 5,625 | (3,000 | ) | ||||||||
Licensing and other |
8,479 | 9,781 | (1,302 | ) | ||||||||
Total Broadcasting Segment Revenues |
26,076 | 31,859 | (5,783 | ) | ||||||||
Broadcasting Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
20,912 | 21,127 | 215 | |||||||||
Selling and promotion |
2,448 | 2,175 | (273 | ) | ||||||||
General and administrative |
4,322 | 4,451 | 129 | |||||||||
Depreciation and amortization |
748 | 837 | 89 | |||||||||
Total Broadcasting Segment Operating Costs and Expenses |
28,430 | 28,590 | 160 | |||||||||
Operating (Loss) / Income |
$ | (2,354 | ) | $ | 3,269 | $ | (5,623 | ) | ||||
Broadcasting revenues decreased 18% for the nine months ended September 30, 2010 from the prior-year period. Advertising revenue decreased $1.5 million primarily due to the decline in household ratings for season 5 of The Martha Stewart Show in syndication compared with season 4. The decrease was partially offset by an increase in the quantity of integrations at higher rates and the inclusion of advertising revenue from our new radio agreement with Sirius XM, which provides for lower licensing fees than our previous agreement, but also provides an opportunity to replace a portion of the licensing fees through advertising sales. However, as a result of the lower licensing fees in the new radio agreement, radio licensing revenue decreased $3.0 million. Television licensing and other revenue decreased $1.3 million due to the absence of revenue from our TurboChef relationship, which contributed revenues in 2009, as well as the timing of revenues related to Whatever, Martha! which was delivered in the third quarter of 2009 and is expected to be delivered in the fourth quarter of 2010. In addition, licensing and other revenue declined due to lower licensing revenues related to Emeril Lagasses television programming and the timing of our international license renewals. The decreases in licensing and other revenue were partially offset by 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.
Production, distribution and editorial expenses decreased $0.2 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. These savings were partially offset by the full recognition of production costs for The Emeril Lagasse Show. Selling and promotion expenses increased $0.3 million due to an increase in headcount and higher compensation-related costs.
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INTERNET SEGMENT
Nine Months Ended September 30, |
||||||||||||
(in thousands) |
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
|||||||||
Internet Segment Revenues |
||||||||||||
Advertising |
$ | 11,914 | $ | 9,445 | $ | 2,469 | ||||||
Other |
130 | 98 | 32 | |||||||||
Total Internet Segment Revenues |
12,044 | 9,543 | 2,501 | |||||||||
Internet Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
6,340 | 5,892 | (448 | ) | ||||||||
Selling and promotion |
6,171 | 5,292 | (879 | ) | ||||||||
General and administrative |
1,200 | 1,472 | 272 | |||||||||
Depreciation and amortization |
753 | 1,461 | 708 | |||||||||
Total Internet Segment Operating Costs and Expenses |
14,464 | 14,117 | (347 | ) | ||||||||
Operating Loss |
$ | (2,420 | ) | $ | (4,574 | ) | $ | (2,154 | ) | |||
Internet revenues increased 26% for the nine months ended September 30, 2010 from the prior-year period. Advertising revenue increased $2.5 million due to an increase in sold advertising volume. Overall rates were lower for the nine-month period ended September 30, 2010 compared to the prior-year period, despite an increase in rates in the third quarter of 2010 as compared to the third quarter of 2009.
Production, distribution and editorial costs increased $0.4 million from the prior-year period due to higher compensation costs from increased headcount, partially offset by lower cash and non-cash bonus accruals. Selling and promotion expenses increased $0.9 million due to additional website infrastructure investment, higher consumer marketing costs, higher commissions and higher compensation expenses from increased headcount. General and administrative expenses decreased $0.3 million due to reduced headcount as compared to the prior-year period. Depreciation and amortization expenses decreased $0.7 million primarily due to the full depreciation by the second quarter of 2010 of the costs associated with the 2007 launch of our redesigned website.
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MERCHANDISING SEGMENT
Nine Months Ended September 30, |
||||||||||||
(in thousands) |
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
|||||||||
Merchandising Segment Revenues |
||||||||||||
Royalty and other |
$ | 30,015 | $ | 19,212 | $ | 10,803 | ||||||
Kmart earned royalty |
1,071 | 6,716 | (5,645 | ) | ||||||||
Kmart minimum true-up |
114 | 939 | (825 | ) | ||||||||
Total Merchandising Segment Revenues |
31,200 | 26,867 | 4,333 | |||||||||
Merchandising Segment Operating Costs and Expenses |
||||||||||||
Production, distribution and editorial |
5,568 | 7,112 | 1,544 | |||||||||
Selling and promotion |
2,883 | 2,090 | (793 | ) | ||||||||
General and administrative |
4,560 | 3,958 | (602 | ) | ||||||||
Depreciation and amortization |
35 | 49 | 14 | |||||||||
Impairment on equity investment |
| 12,600 | 12,600 | |||||||||
Total Merchandising Segment Operating Costs and Expenses |
13,046 | 25,809 | 12,763 | |||||||||
Operating Income |
$ | 18,154 | $ | 1,058 | $ | 17,096 | ||||||
Merchandising revenues increased 16% for the nine months ended September 30, 2010 from the prior-year period. Royalty and other revenue increased $10.8 million mostly due to the contributions of our new merchandising relationships, higher royalty rates and sales volume from certain of our existing partners, the additional one-time revenue from the early termination of our agreement with 1-800-Flowers.com and a one-time $1.0 million payment received from a manufacturing partner. These increases in royalty and other revenue were partially offset by the absence of revenue from our TurboChef relationship, which contributed revenues in 2009. In addition, the prior-year period included $7.7 million of revenues related to our agreement with Kmart. The pro-rata portion of revenues related to the contractual minimum amounts from Kmart covering the nine months ended September 30, 2010 and 2009 is listed separately above as Kmart minimum true-up.
Production, distribution and editorial expenses decreased $1.5 million due to lower allocated facilities costs, as compared to the prior-year period, as well as lower cash and non-cash bonus accruals. The allocation policy for facilities expenses changed in 2010 for the Merchandising segment only. All allocated rent and facilities charges are now reflected in the Merchandising segment in the general and administrative expense category. This allocation change does not impact any of our other business segments. Selling and promotion expenses increased $0.8 million mostly as a result of services that we provide to our partners for reimbursable creative services projects, as well as higher consulting fees. General and administrative costs increased $0.6 million largely due to higher allocated facilities costs due to the change in policy described above, as well as higher compensation expenses, partially offset by lower cash and non-cash bonus accruals. In the nine months ended September 30, 2009, we recorded non-cash impairment charges of $12.6 million related to our cost-based equity investment in United Craft MS Brands, LLC.
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CORPORATE
Nine Months
Ended September 30, |
||||||||||||
(in thousands) |
2010 (unaudited) |
2009 (unaudited) |
Better / (Worse) |
|||||||||
Corporate Operating Costs and Expenses |
||||||||||||
General and administrative |
$ | 24,108 | $ | 28,204 | $ | 4,096 | ||||||
Depreciation and amortization |
1,984 | 3,461 | 1,477 | |||||||||
Total Corporate Operating Costs and Expenses |
26,092 | 31,665 | 5,573 | |||||||||
Operating Loss |
$ | (26,092 | ) | $ | (31,665 | ) | $ | 5,573 | ||||
Corporate operating costs and expenses decreased 18% for the nine months ended September 30, 2010 from the prior-year period. General and administrative expenses decreased $4.1 million due to lower rent expense from the consolidation of certain offices and lower cash and non-cash bonus accruals and lower compensation and related expenses. Depreciation and amortization expenses decreased $1.5 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 both the nine months ended September 30, 2010 and 2009.
Loss on sale of fixed asset. Loss on the sale of a fixed asset was $0.6 million for the nine months ended September 30, 2010 with no comparable loss in the prior-year period.
Gain on sale of short-term investments. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $0.4 million for the nine months ended September 30, 2010 and $0.3 million in the prior-year period.
Loss on equity securities. Loss on equity securities was $0.02 million for the nine months ended September 30, 2010 compared to $0.9 million in the prior-year period. The losses were 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 nine months ended September 30, 2009 with no comparable loss in the current period. The other loss in 2009 was related to certain investments in equity securities that were previously accounted for under the equity method but, since the second quarter of 2009, have been accounted for under the cost method.
Income tax expense. Income tax expense for the nine months ended September 30, 2010 was $1.3 million, compared to a $1.2 million in the prior-year period.
Net Loss. Net loss was $13.7 million for the nine months ended September 30, 2010, compared to a net loss of $35.3 million for the nine months ended September 30, 2009, as a result of the factors described above.
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Liquidity and Capital Resources
Overview
During the first nine months of 2010, our overall cash, cash equivalents and short-term investments increased $2.9 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, partially offset by capital expenditures and principal pre-payments of our loan with Bank of America. Cash, cash equivalents and short-term investments were $41.4 million and $38.5 million at September 30, 2010 and December 31, 2009, respectively. In addition, as of September 30, 2010, we had $1.0 million in receivables that represents cash proceeds from the sale of certain marketable equity securities that was settled during the first week of October 2010.
While we have generated cash from operating activities in excess of cash used in investing and financing activities for the first nine months of 2010, we anticipate an overall use of cash for the full year 2010. However, we believe that our available cash balances and short-term investments will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next twelve months.
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 / (used in) operating activities was $7.0 million and $(1.9) million for the nine months ended September 30, 2010 and 2009, respectively. During the first nine months 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 short- and long-term investments, additions to property, plant, and equipment, and for the acquisition of new businesses.
Cash used in investing activities was $2.2 million and $6.9 million for the nine months ended September 30, 2010 and 2009, respectively. During the first nine months of 2010, cash flow used in investing activities reflected $4.2 million of cash used for capital improvements primarily in conjunction with our relocation and consolidation of certain offices. The cash used for capital expenditures was partially offset by the cash received from the sale of certain fixed assets.
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 $2.9 million and $19.4 million for the nine months ended September 30, 2010 and 2009. During the first nine months of 2010, we made $3.0 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, 2010 for a one-year period. The renewal did not include any substantive changes from the prior years terms. We were compliant with the debt covenants as of September 30, 2010. We had no outstanding borrowings under this facility as of September 30, 2010 and had letters of credit outstanding of $2.6 million.
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In April 2008, we entered into a loan agreement with Bank of America for a term loan 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 aggregate, as of September 30, 2010, we had paid $19.5 million in principal on the term loan, including prepayment of the $4.5 million due through June 30, 2011. At September 30, 2010, the outstanding balance under the loan was $10.5 million. The interest rate is equal to a floating rate of 1-month London Interbank Offered Rate (LIBOR) plus 2.85%.
The loan terms require us to be in compliance with certain financial and other 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, some of which are rolling twelve-month covenants, as of September 30, 2010. However, because we will lose the benefit of certain one-time, non-recurring results that positively impacted the fourth quarter of 2009 that will be absent from the fourth quarter of 2010, we anticipated that we would be in violation of the covenants of the loan agreement that require us to maintain a Funded Debt to EBITDA Ratio (as defined in the loan agreement) equal to or less than 2.0 and a Parent Guarantor Basic Fixed Charge Ratio (as defined in the loan agreement) equal to or greater than 2.75 as of the twelve month period ending December 31, 2010. To avoid an event of default, we have executed a waiver in respect of the maintenance of these covenants of the loan agreement with Bank of America that applies to the fourth quarter of 2010 and the first quarter of 2011. See Note 7 of the Notes to the Financial Statements contained in our 2009 Annual Report for additional information about our loan agreement with Bank of America.
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 and our other websites 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. Our agreement with Kmart ended in January 2010.
Off-Balance Sheet Arrangements
At September 30, 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:
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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.
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, our 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 Topic 718, Compensation Stock Compensation. 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 also hold a derivative financial instrument that could expose us to further market risk. We do not utilize financial instruments for trading purposes.
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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 plus 2.85% and averaged 3.14% for the quarter ended September 30, 2010. 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 $10.5 million on the loan at September 30, 2010. A one percentage point increase in the interest rate from the quarterly average would have increased interest expense by $0.03 million for the three months ended September 30, 2010.
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 September 30, 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 $0.1 million for the three months ended September 30, 2010.
Stock Prices
We own marketable equity securities in a publicly traded company that is subject to market price volatility. This investment had an aggregate fair value of approximately $3.3 million as of September 30, 2010. A hypothetical decrease in the market price of this investment of 10% would result in a fair value of approximately $3.0 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 third 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.
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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.
ITEM 1A. | RISK FACTORS |
There have been no material changes from legal proceedings as previously 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 September 30, 2010:
(a) | (b) | (c) | (d) | |||||||||||||
Period |
Total Number of Shares (or Units) Purchased (1) |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs |
||||||||||||
July 2010 |
22,227 | $ | 4.87 | Not applicable | Not applicable | |||||||||||
August 2010 |
| | Not applicable | Not applicable | ||||||||||||
September 2010 |
278 | $ | 4.69 | Not applicable | Not applicable | |||||||||||
Total for quarter ended September 30, 2010 |
22,505 | $ | 4.83 | 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. |
On November 1, 2010, Bank of America, N.A. (the Bank) executed a waiver under the Amended and Restated Loan Agreement among the Bank and Martha Stewart Living Omnimedia, Inc. and its wholly-owned subsidiary, MSLO Emeril Acquisition Sub LLC dated as of August 7, 2009, pursuant to which the Bank agreed to waive the application of the covenants set forth in Section 8.2 (Funded Debt to EBITDA Ratio) and Section 8.3 (Parent Guarantor Basic Fixed Charge Coverage Ratio) of the Amended and Restated Loan Agreement with respect to the last day of each of the fiscal quarters ending December 31, 2010 and March 31, 2011.
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ITEM 6. | EXHIBITS. |
Exhibit |
Exhibit Title | |
10.1 | Waiver dated as of November 1, 2010, to the Amended and Restated Loan Agreement, dated as of August 7, 2009, by and among Bank of America, N.A., MSLO Emeril Acquisition Sub LLC and Martha Stewart Living Omnimedia, Inc. | |
10.2 | Amendment dated as of October 29, 2010 to the Employment Agreement, dated as of September 17, 2008, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman. | |
31.1 | Certification of Principal Executive Officer | |
31.2 | Certification of Chief Financial Officer | |
32 | Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MARTHA STEWART LIVING OMNIMEDIA, INC. | ||
Date: |
November 4, 2010 | |
/S/ KELLI TURNER | ||
Name: | Kelli Turner | |
Title: | Chief Financial Officer | |
(Principal Financial Officer and duly authorized officer) |
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Table of Contents
EXHIBIT INDEX
Exhibit |
Exhibit Title | |
10.1 | Waiver dated as of November 1, 2010, to the Amended and Restated Loan Agreement, dated as of August 7, 2009, by and among Bank of America, N.A., MSLO Emeril Acquisition Sub LLC and Martha Stewart Living Omnimedia, Inc. | |
10.2 | Amendment dated as of October 29, 2010 to the Employment Agreement, dated as of September 17, 2008, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman. | |
31.1 | Certification of Principal Executive Officer | |
31.2 | Certification of Chief Financial Officer | |
32 | Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
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