SECURITIES AND EXCHANGE COMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
COMMISSION FILE NUMBER 001-15395
Martha Stewart Living Omnimedia, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-2187059
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11 West 42nd Street 10036
New York, NY (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (212) 827-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 23, 1999
Class A, $0.01 par value 15,477,170
Class B, $0.01 par value 34,126,831
-----------------
Total 49,604,001
=================
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
Page
----
Part I. Financial information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports of Form 8-K 17
Signatures 18
Index to Exhibits 19
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<S> <C> <C>
December 31, September 30,
1998 1999
------------ -------------
ASSETS (unaudited)
- ------
CURRENT ASSETS
Cash and cash equivalents $ 24,578 $ 31,884
Accounts receivable, net 25,260 28,964
Inventories 6,522 8,354
Deferred television production costs 3,038 3,526
Other current assets 275 1,192
------------ -------------
Total current assets 59,673 73,920
------------ -------------
PROPERTY, PLANT AND EQUIPMENT, net 11,468 15,803
------------ -------------
INTANGIBLE ASSETS, net 53,108 50,895
------------ -------------
OTHER ASSETS 1,123 1,885
------------ -------------
Total assets $ 125,372 $ 142,503
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 26,879 $ 30,032
Current portion of deferred subscription income 26,756 26,589
------------ -------------
Total current liabilities 53,635 56,621
------------ -------------
DEFERRED INCOME 6,504 5,471
------------ -------------
LONG TERM DEBT, less current maturities 27,650 --
------------ -------------
OTHER NONCURRENT LIABILITIES 768 4,196
------------ -------------
STOCKHOLDERS' EQUITY 36,815 76,215
------------ -------------
Total liabilities and stockholders' equity $ 125,372 $ 142,503
============ =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except share amounts)
<TABLE>
<S> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues
Publishing $31,654 $30,313 $104,968 $95,014
Television 6,418 5,610 19,205 16,197
Merchandising 4,789 4,353 16,298 10,975
Internet/Direct Commerce 6,977 2,303 20,869 6,646
------------ ------------ ------------ ------------
Total revenues 49,838 42,579 161,340 128,832
------------ ------------ ------------ ------------
Operating costs and expenses
Production, distribution and editorial 28,084 19,081 82,794 55,573
Selling and promotion 7,547 7,464 27,541 25,302
General and administrative 8,533 5,686 27,134 19,691
Depreciation and amortization 1,761 1,304 4,493 3,969
------------ ------------ ------------ ------------
Total operating costs and expenses 45,925 33,535 141,962 104,535
------------ ------------ ------------ ------------
Income from operations 3,913 9,044 19,378 24,297
------------ ------------ ------------ ------------
Other expenses 439 759 1,738 2,824
------------ ------------ ------------ ------------
Net income 3,474 8,285 17,640 21,473
------------ ------------ ------------ ------------
Pro forma adjustment to income tax
provision 1,597 3,582 8,350 9,871
------------ ------------ ------------ ------------
Pro forma net income $1,877 $4,703 $9,290 $11,602
============ ============ ============ ============
Pro forma earnings per share
Basic and Diluted $0.05 $0.12 $0.23 $0.30
------------ ------------ ------------ -------------
Weighted average shares outstanding 40,619,029 39,175,714 39,656,819 39,175,714
------------ ------------ ------------ ------------
Adjusted pro forma earnings per share
Basic and Diluted $0.04 $0.09 $0.19 $0.23
------------ ------------ ------------ ------------
Adjusted shares outstanding 49,583,392 49,583,392 49,583,392 49,583,392
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
<TABLE>
<S> <C>
Nine Months Ended
September 30,
-------------------------
</TABLE>
<TABLE>
<S> <C>
1999 1998
----------- -----------
</TABLE>
<TABLE>
<S> <C> <C>
Cash flows from operating activities
Net income $ 17,640 $ 21,473
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 4,493 3,969
Changes in operating assets and liabilities (7,341) (15,090)
----------- -----------
Net cash provided by operating activities 14,792 10,352
----------- -----------
Cash flows from investing activities
Capital expenditures (1,596) (1,942)
Proceeds from sale leaseback transaction -- 2,389
----------- -----------
Net cash provided by (used in) investing activities (1,596) 447
----------- -----------
Cash flows from financing activities
Issuance of equity 25,000
Principal repayment of long term debt (27,650) (2,350)
Distributions to members (3,240) (114)
----------- -----------
Net cash used in financing activities (5,890) (2,464)
----------- -----------
Net increase in cash 7,306 8,335
Cash and cash equivalents, beginning of period 24,578 9,971
----------- -----------
Cash and cash equivalents, end of period $ 31,884 $ 18,306
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Martha Stewart Living Omnimedia, Inc. (together with its subsidiary, the
"Company") includes the operations, assets and liabilities of Martha Stewart
Living Omnimedia LLC ("MSLO"), a predecessor to the Company and its former
parent, which was merged with and into the Company on October 22, 1999. This
merger was accounted for as a combination of companies under common control and
accordingly, the financial statements for prior periods have been retroactively
restated.
1. Accounting policies
a. General
The information included in the foregoing interim condensed consolidated
financial statements is unaudited. In the opinion of management, all
adjustments which are of a normal recurring nature and necessary for a fair
presentation of the results of operations for the interim periods presented
have been reflected herein. The results of operations for interim periods
are not necessarily indicative of the results to be expected for the entire
year. Readers are referred to the Company's Registration Statement on Form
S-1 (File No. 333-84001) for complete financial statements and related
notes.
b. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Management does not expect such differences to have a material effect on
the Company's consolidated financial statements.
c. Intangible assets
Intangible assets, representing the excess of purchase price over net
assets acquired, include the value assigned to subscriber lists, trade
names and goodwill, and are being amortized over twenty years. Management
reassesses quarterly the appropriateness of both the carrying value and
remaining life of intangible assets, principally based on forecasts of
future undiscounted cash flows.
d. Income taxes
No provision has been made in the accompanying condensed consolidated
financial statements for federal income taxes since, pursuant to provisions
of the Internal Revenue Code, the results of operations of MSLO during the
relevant time periods were reportable by the members of MSLO on their
individual tax returns. However, MSLO was subject to certain foreign, state
and city income taxes. The pro forma adjustment to income tax provision and
pro forma net income reflect the additional income taxes as though the
merger of MSLO with the Company had occurred prior to the start of each
period.
6
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
2. Equity Transactions
Strategic Investment
On July 27, 1999, an affiliate of Kleiner Perkins Caufield & Byers, a
venture capital firm, acquired 5% of the Company and was issued a warrant
to acquire 15% of any publicly traded class of stock issued by the Company
that is intended to reflect the performance of the Company's Internet
business (as defined in the warrant) in exchange for $25 million in cash.
The warrant may also become exercisable in the event of a business
combination relating to, or a sale of, the Company's Internet business. The
warrant, which has an exercise price of $21 million, expires July 27, 2002,
and may expire earlier in certain circumstances. $14.3 million of the
proceeds from this transaction were used to repay the loan from Bank of
America, N.A. (See Note 4).
Initial Public Offering
On October 22, 1999, the Company completed an initial public offering of
8,280,000 shares of Class A common stock at $18.00 per share, raising net
proceeds after underwriting discounts and commissions of $138.6 million.
3. Inventories
The components of inventories are as follows :
December 31, September 30,
1998 1999
-------------- ---------------
(in thousands)
Paper $ 4,621 $ 4,324
Catalog merchandise 1,901 4,030
-------------- ---------------
$ 6,522 $ 8,354
============== ===============
4. Note Payable and Line of Credit
The Company had a note payable aggregating $27.65 million to Time
Publishing Ventures, Inc. at December 31, 1998. The note was due on
February 3, 2001 and bore interest at the prime rate plus 1% per annum. In
March 1999, the Company entered into an agreement with Bank of America,
N.A., formerly known as NationsBank, N.A., for a loan in the amount of $15
million. The proceeds from the loan were used, along with existing cash
balances, to pay in full, the note payable to Time Publishing Ventures
aggregating $27.65 million plus accrued interest.
In July 1999, the Company repaid the Bank of America, N.A. loan with the
proceeds received from the Kleiner Perkins investment (See Note 2).
The Company has an agreement with Bank of America, N.A. for a line of
credit in the amount of $10 million with an interest rate equal to the
prime rate per annum. The agreement also requires the Company to pay a
commitment fee equal to one-half of 1% per annum of the unused available
borrowings. This agreement also contains certain financial and nonfinancial
covenants, including the maintenance of a minimum debt service coverage
ratio and a quick ratio, and a limitation on capital expenditures and
investments. The Company was in compliance with all such covenants as of
September 30, 1999. As of December 31, 1998 and September 30, 1999, the
Company did not have any amounts outstanding under this agreement.
7
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Earnings per share
Basic pro forma earnings per share amounts are calculated based upon the
weighted average number of common shares outstanding during each period
presented.
Adjusted basic pro forma earnings per share amounts are calculated based
upon the number of common shares outstanding as if all common shares issued
in connection with the Kleiner Perkins investment and the initial public
offering were outstanding for all periods presented in order to better
reflect comparability between periods. Proceeds received from these
transactions have not been included in the calculation of earnings per
share.
There was no dilution from common stock equivalents outstanding during such
periods and accordingly diluted earnings per share is not presented
separately.
6. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business
segments are Publishing, Television, Merchandising and Internet/Direct
Commerce. Magazine operations account for over 90% of the revenues of the
Publishing segment, which also includes book publishing, newspaper
syndication and radio syndication. The Television segment includes a
television program that airs in syndication in the United States and on
cable in the United States and Canada as well as weekly segments on the CBS
This Morning program. The Merchandising segment consists solely of royalty
revenues generated by the sale of Martha Stewart branded products. The
Internet/Direct Commerce segment comprises the sale of Martha by Mail
products through the Company's website and print catalog as well as
advertising revenues derived from advertisements on the website.
Revenues for each segment are presented in the condensed consolidated
statements of operations. Income from operations for each segment were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands)
Publishing $ 10,432 $ 10,215 $ 34,525 $ 33,391
Television 198 603 1,956 893
Merchandising 4,686 4,907 16,117 11,477
Internet/Direct Commerce (3,626) (389) (7,708) (2,132)
--------- --------- --------- ---------
Total before corporate
charges 11,690 15,336 44,890 43,629
Corporate charges (7,777) (6,292) (25,512) (19,332)
--------- --------- --------- ---------
Income from operations $ 3,913 $ 9,044 $ 19,378 $ 24,297
========= ========= ========= =========
8
<PAGE>
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Supplemental Cash Flow Information
For the Nine Months Ended
September 30,
--------------------------
1999 1998
----------- -----------
(in thousands)
Cash paid for interest $ 2,463 $ 2,666
Cash paid for income taxes 683 211
During the nine months ended September 30, 1999, the Company refinanced
existing leases for computer and television equipment. Under this
refinancing, the new lease was recorded as a capital lease and the Company
recorded property, plant and equipment of $5 million with a corresponding
liability for capital lease obligations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
On October 22, 1999, subsequent to the end of this quarter, we completed our
initial public offering and raised net proceeds of $138.6 million upon the
issuance of 8,280,000 shares of Class A common stock. Accordingly, our results
of operations and financial position as of and for the periods ended September
30, 1999 do not reflect the impact of the offering.
In this report, the terms "we," us" and "our" refer to Martha Stewart Living
Omnimedia, Inc., and, unless the context requires otherwise, Martha Stewart
Living Omnimedia LLC ("MSLO LLC"), the legal entity that prior to October 22,
1999 operated the business we now operate.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Three Months Ended
September 30,
------------------------------
1999 1998
-------------- --------------
(in thousands)
Revenues
Publishing $ 31,654 $ 30,313
Television 6,418 5,610
Merchandising 4,789 4,353
Internet/Direct Commerce 6,977 2,303
-------------- --------------
Total revenues 49,838 42,579
-------------- --------------
Operating costs and expenses
Production, distribution and editorial 28,084 19,081
Selling and promotion 7,547 7,464
General and administrative 8,533 5,686
Depreciation and amortization 1,761 1,304
-------------- --------------
Total operating costs and expenses 45,925 33,535
-------------- --------------
Income from operations 3,913 9,044
-------------- --------------
Other expenses 439 759
-------------- --------------
Net income 3,474 8,285
-------------- --------------
Pro forma adjustment to income tax provision 1,597 3,582
-------------- --------------
Pro forma net income 1,877 4,703
============== ==============
Revenues. Total revenues increased $7.3 million, or 17.0%, to $49.8 million for
the three months ended September 30, 1999, from $42.6 million for the three
months ended September 30, 1998. Publishing revenues increased $1.3 million, or
4.4%, to $31.7 million for the three months ended September 30, 1999 from $30.3
million for the three months ended September 30, 1998. This increase was
primarily due to an increase in advertising revenues as a result of an increase
in advertising pages sold in Martha Stewart Living magazine. Television revenues
increased $0.8 million, or 14.4%, to $6.4 million for the three months ended
September 30, 1999 from $5.6 million for the three months ended September 30,
1998. The increase is due primarily to additional revenues associated with the
addition of a second half hour to our syndicated daily program, partially offset
by reduced advertising revenues from lower ratings during the three months ended
September 30, 1999. Merchandising revenues increased $0.4 million, or 10.0%, to
$4.8 million for the three months ended September 30, 1999 from $4.4 million for
the three months ended September 30, 1998. Internet/Direct Commerce revenues
increased $4.7 million, or 203.0%, to $7.0 million for the three months ended
September 30, 1999 from $2.3 million for the three months ended September
10
<PAGE>
30, 1998, due to increased merchandise sales resulting from higher catalog
circulation and Internet traffic.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $9.0 million, or 47.2%, to $28.1 million for the three months
ended September 30, 1999 from $19.1 million for the three months ended September
30, 1998. Internet/Direct Commerce costs increased $7.2 million due to an
increase in cost of goods sold and fulfillment costs, each as a result of higher
revenues, as well as increased catalog production and distribution costs
resulting from higher catalog circulation. In addition, Internet costs increased
due to increased investment in developing and maintaining our Internet site.
Publishing segment costs increased $1.2 million reflecting increased costs for
Martha Stewart Living magazine due to an increase in the number of pages printed
per issue and higher printing costs. Television costs increased $0.7 million,
primarily as a result of additional production and distribution costs incurred
for the additional half-hour of programming in 1999.
Selling and promotion. Selling and promotion expenses remained constant at $7.5
million in each period.
General and administrative. General and administrative expenses, consisting
primarily of costs relating to the executive office, finance, professional
services, information technology, office services (including rent) and human
resources, increased $2.8 million, or 50.1%, to $8.5 million for the three
months ended September 30, 1999 from $5.7 million for the three months ended
September 30, 1998. We have incurred higher costs as a result of continued
infrastructure development to support higher levels of revenue, including
Internet development.
Depreciation and amortization. Depreciation and amortization increased $0.5
million, or 35.0% to $1.8 million for the three months ended September 30, 1999
from $ 1.3 million for the three months ended September 30, 1998. The increase
is attributable to higher levels of property and equipment, including $5.0
million of equipment leases that were refinanced into capital leases.
Other expenses, representing net interest expense and provision for income taxes
decreased $0.3 million, or 42.2%, to $0.4 million for the three months ended
September 30, 1999 from $0.7 million for the three months ended September 30,
1998, as a result of lower outstanding long-term debt, higher interest income
earned on higher invested cash balances and lower taxable income.
Net income decreased $4.8 million, to $3.5 million for the three months ended
September 30, 1999 from $8.3 million for the three months ended September 30,
1998, primarily as a result of the above mentioned factors.
11
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Nine Months Ended
September 30,
------------------------------
1999 1998
-------------- --------------
(in thousands)
Revenues
Publishing $ 104,968 $ 95,014
Television 19,205 16,197
Merchandising 16,298 10,975
Internet/Direct Commerce 20,869 6,646
-------------- --------------
Total revenues 161,340 128,832
-------------- --------------
Operating costs and expenses
Production, distribution and editorial 82,794 55,573
Selling and promotion 27,541 25,302
General and administrative 27,134 19,691
Depreciation and amortization 4,493 3,969
-------------- --------------
Total operating costs and expenses 141,962 104,535
-------------- --------------
Income from operations 19,378 24,297
-------------- --------------
Other expenses 1,738 2,824
-------------- --------------
Net income 17,640 21,473
-------------- --------------
Pro forma adjustment to income tax provision 8,350 9,871
-------------- --------------
Pro forma net income $ 9,290 $ 11,602
============== ==============
Revenues. Total revenues increased $32.5 million, or 25.2.%, to $161.3 million
for the nine months ended September 30, 1999, from $128.8 million for the nine
months ended September 30, 1998. Publishing revenues increased $10.0 million, or
10.5%, to $105.0 million for the nine months ended September 30, 1999 from $95.0
million for the nine months ended September 30, 1998. This increase was
primarily a result of an increase in advertising revenues resulting from an
increase in advertising pages sold in Martha Stewart Living magazine. In
addition, two issues of Martha Stewart Weddings magazine were published during
the nine months ended September 30, 1999, compared to one issue during the nine
months ended September 30, 1998. Television revenues increased $3.0 million, or
19%, to $19.2 million for the nine months ended September 30, 1999 from $16.2
million for the nine months ended September 30, 1998. The increase is due
primarily to additional revenues associated with the addition of a second half
hour to our syndicated daily program, partially offset by reduced advertising
revenues from lower ratings during the nine months ended September 30, 1999.
Merchandising revenues increased $5.3 million, or 48.5%, to $16.3 million for
the nine months ended September 30, 1999, from $11.0 million for the nine months
ended September 30, 1998, primarily due to revenues received from our Martha
Stewart Everyday line of garden products launched in the first quarter of 1999.
Internet/Direct Commerce revenues increased $14.2 million, or 214%, to $20.9
million for the nine months ended September 30, 1999 from $6.6 million for the
nine months ended September 30, 1998, due primarily to higher merchandise sales
resulting from higher catalog circulation and Internet traffic.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $27.2 million, or 49.0%, to $82.8 million for the nine months
ended September 30, 1999 from $55.6 million for the nine months ended September
30, 1998. Internet/Direct Commerce costs increased $19.1 million due to an
increase in fulfillment costs and increased cost of goods sold, each as a result
of higher revenues, as well as increased catalog production and distribution
costs resulting from higher catalog circulation. In addition, Internet costs
increased due to increased investment in developing and maintaining our Internet
site. Publishing segment costs increased $7.1 million reflecting increased costs
for Martha Stewart Living magazine due to an increase in the number of pages
printed per issue, an increase in the number of copies printed and higher
printing costs. In addition, costs for Martha Stewart Weddings magazine were
higher due to the publication of two issues during the nine months ended
September 30, 1999, as compared to one
12
<PAGE>
issue during the nine months ended September 30, 1998. Television costs
increased $1.2 million, primarily as a result of additional production and
distribution costs incurred for the additional half-hour of programming in 1999.
Selling and promotion. Selling and promotion expenses increased $2.2 million, or
8.8%, to $27.5 million for the nine months ended September 30, 1999 from $25.3
million for the nine months ended September 30, 1998. This increase primarily
reflects increased Publishing segment costs resulting from increased circulation
costs of $0.9 million and advertising sales costs of $ 0.6 million both to
support higher revenues.
General and administrative. General and administrative expenses, consisting
primarily of costs relating to the executive office, finance, professional
services, information technology, office services, including rent, and human
resources, increased $7.4 million, or 37.8%, to $27.1 million for the nine
months ended September 30, 1999 from $19.7 million for the nine months ended
September 30, 1998. We have incurred higher costs as a result of continued
infrastructure development to support higher levels of revenues, including
Internet development. In addition, we incurred $1.1 million in consulting costs
during the nine months ended September 30, 1999, primarily related to human
resource and information technology-related projects.
Depreciation and amortization. Depreciation and amortization increased $0.5
million, or 13.2% to $4.5 million for the nine months ended September 30, 1999
from $4.0 million for the nine months ended September 30, 1998. The increase is
attributable to higher levels of property and equipment, including $5.0 million
of equipment leases that were refinanced into capital leases.
Other expenses, representing interest expense, net and provision for income
taxes decreased $1.1 million, or 38.5% to $1.7 million for the nine months ended
September 30, 1999 from $2.8 million for the nine months ended September 30,
1998, as a result of lower outstanding long-term debt, higher interest income
earned on higher invested cash balances and lower taxable income.
Net income decreased $3.8 million, to $17.6 million for the nine months ended
September 30, 1999 from $21.5 million for the nine months ended September 30,
1998, primarily as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $31.9 million at September 30, 1999, compared to
$24.6 million at December 31, 1998, an increase of $7.3 million. Cash and cash
equivalents were $18.3 million at September 30, 1998, compared to $10.0 million
at December 31, 1997, an increase of $8.3 million.
Cash flows from operating activities were $14.8 million during the nine months
ended September 30, 1999, compared with $10.4 million for the nine months ended
September 30, 1998. The increase in cash flows from operating activities in 1999
was primarily a result of increased cash received from licensing agreements,
pursuant to which prior advances were fully earned in early 1999, and additional
royalties were received. This increase was partially offset by lower net income
during the nine months ended September 30, 1999, compared to the nine months
ended September 30, 1998.
Cash flows used in investing activities were $1.6 million during the nine months
ended September 30, 1999, representing capital expenditures to acquire property
and equipment. Cash flows provided by investing activities were $0.4 million
during the nine months ended September 30, 1998, representing proceeds received
from a sale/leaseback of $2.4 million, offset by $2.0 million of capital
expenditures to acquire property and equipment. In July 1999, the Company
refinanced existing operating leases for computer and television studio
equipment. Under this refinancing, the new lease was recorded as a capital
lease. Accordingly, in July 1999, the Company recorded property, plant and
equipment of $5.0 million with a corresponding liability for capital lease
obligations.
Cash flows used in financing activities during the nine months ended September
30, 1999 were $5.9
13
<PAGE>
million. In March 1999, we prepaid our outstanding long-term debt to Time
Publishing Ventures, totaling $27.7 million plus accrued interest, with the
proceeds of a $15.0 million term loan from Bank of America, N.A., formerly known
as NationsBank, N.A., and existing cash of $12.7 million plus accrued interest.
The outstanding amount of the loan was repaid in July 1999 with the net proceeds
of $25.0 million received from the Kleiner Perkins equity purchase.
Distributions to the members of MSLO were $3.2 million for the nine months ended
September 30, 1999, compared to $0.1 million for the nine months ended September
30, 1998.
We have a line of credit with Bank of America in the amount of $10.0 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of September 30, 1999, we had no outstanding borrowings
under this facility. The line of credit is secured by accounts receivable,
inventory, intangible assets and contracts and contains customary financial and
other covenants.
We believe that the net proceeds from the initial public offering, completed in
October 1999, together with any cash generated from operations and any funds
available under existing credit facilities will be sufficient to meet our
operating and recurring cash needs for foreseeable periods.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, Martha Stewart Living magazine is published ten times annually:
three issues in each of the first and second quarters and two issues in each of
the third and fourth quarters. Martha Stewart Weddings is published four times
annually: one issue in each of the second and third quarters and two issues in
the fourth quarter. In addition, the number of advertising pages per issue tend
to be higher in issues published in the fourth quarter. Revenue and income from
operations for the television segment tend to be higher in the fourth quarter
due to generally higher ratings and, on occasion, the broadcast of a holiday
prime time television special. Internet/Direct Commerce revenues also tend to be
higher in the fourth quarter due to increased consumer spending during that
period. Revenues from the Merchandising segment can vary significantly from
quarter to quarter due to new product launches.
YEAR 2000
Beginning in 1998, and continuing in 1999, we have conducted a review of our
computer systems and software to identify any potential malfunctions due to
misidentification of the year 2000. We have also made inquiries of our important
third-party vendors, service providers, customers and partners, to determine
whether our business relationships with these parties could be adversely
affected by year 2000 issues. We have utilized both internal and external
resources to identify, test and correct our systems and software for year 2000
readiness.
We have completed the research, validation and testing of all infrastructure,
hardware and software, including platform, wide-area network and local-area
network components.
All of our internal non-compliant systems have been remedied or contingency
plans have been put into place so that we should not experience any significant
disruption or down-time resulting from year 2000 compliance issues. The costs of
these year 2000 remedial actions have been less than $0.3 million, including the
costs to us of external service provider compliance.
We have contacted all significant third-party vendors and service providers to
determine their year 2000 compliance status. We have also made inquiries of our
important customers and partners as to whether their state of year 2000
compliance could have an adverse effect on our relationship with these parties.
We have not been informed that any of these parties expects material disruption
in their business relationship with us due to year 2000 compliance. However,
this process is ongoing, and we cannot independently verify the state of
readiness of these vendors, service providers, partners and customers.
14
<PAGE>
We do not believe, based upon our investigations to date, that the year 2000
issue will have a material effect on our operations or those of our material
service providers or our business relationship with our important partners and
customers. However, if we or any of our significant service providers, partners
or customers do experience a year 2000 compliance problem, this could have a
material adverse effect on our profitability and liquidity. In some cases, these
services, partners and customers cannot be easily replaced, and we may suffer a
disruption in our business while we seek to identify a new service provider,
customer or partner. In addition, any material disruption in the use or
accessibility of the Internet due to year 2000 issues could result in a serious
decline in our Internet-related businesses, including advertising revenues, as
well as delay implementation of this portion of our growth strategy. These
contingencies could have a material adverse effect on our financial condition
and results of operations, and we are not aware of any adequate replacement
service for the Internet.
15
<PAGE>
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Sale of Unregistered Securities
Subsequent Events
On October 22, 1999, we issued an aggregate of 7,110,761 shares of our Class A
Common Stock, and 34,126,831 shares of our Class B Common Stock, in exchange for
all of the outstanding membership interests of MSLO LLC, pursuant to a merger of
MSLO LLC with and into us. There were no cash proceeds from this issuance, and
no underwriters, brokers or finders were employed in connection with this
transaction. The issuance of the above securities was deemed to be exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of the
Securities Act of 1933, as a transaction by an issuer not involving a public
offering, based on, among other considerations, the limited number of offerrees,
the sophistication of the offerrees, and the access the offerrees had to
relevant information and management.
(b) Use of Proceeds
The effective date of our first registration statement, filed on Form S-1
(File No. 333-84001) under the Securities Act of 1933, relating to our initial
public offering of Class A Common Stock, was October 18, 1999. A total of
8,280,000 shares were sold in the offering. Of this amount, 6,840,000 shares
were offered in the United States and Canada and 1,440,000 shares were offered
outside the United States and Canada. The managing underwriters for the U.S. and
Canadian portion of the offering were Morgan Stanley Dean Witter, Merrill Lynch
& Co., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette and Banc of
America Securities LLC. The managing underwriters for the international portion
of the offering were Morgan Stanley Dean Witter, Merrill Lynch International,
Bear Stearns International Limited, Donaldson, Lufkin & Jenrette and Banc of
America International Limited.
The offering commenced on October 18, 1999, and was completed on October
22, 1999. The aggregate offering price was $149.0 million. The underwriting
discount was $10.4 million, and we incurred other expenses (including filing,
legal and accounting fees) of approximately $5.0 million, none of which were
paid to our directors or officers or their affiliates or to persons owning 10%
or more of any class of our common stock or that of our affiliates. Our net
proceeds from the offering were $133.6 million. Upon completion of the offering
on October 22, 1999, we invested the proceeds in government securities and other
short-term, investment-grade, interest bearing instruments.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 26, 1999, MSLO LLC, then our sole shareholder, approved by written
consent the 1999 Stock Incentive Plan, the 1999 Non-Employee Director Stock and
Option Compensation Plan, and the 1999 Employee Stock Purchase Plan (the
"Plans").
On September 22, 1999, MSLO LLC, then our sole shareholder, approved by
written consent the Plans, each revised to include the number of shares of Class
A common stock subject to such Plan.
Additionally, on July 27, 1999, the members of MSLO LLC unanimously
approved the sale of Class K Interests in MSLO LLC to KPCB Holdings, Inc., an
affiliate of Kleiner Perkins Caufield & Byers, pursuant to an LLC Membership
Interest Purchase Agreement, dated as of July 27, 1999. This approval was
granted by all members by executing the Fourth Amended and Restated LLC
Agreement of MSLO LLC.
16
<PAGE>
Subsequent Events
On October 11, 1999, MSLO LLC, then our sole shareholder, and all the members of
MSLO LLC approved by unanimous written consent the adoption of the merger of
MSLO LLC into us, as well as the merger agreement pursuant to which the merger
was consummated.
ITEM 5: OTHER INFORMATION
Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of
1995
We have included in this Report on Form 10-Q, and from time to time our
management may make, statements which may constitute "forward-looking
statements" within the meaning of the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
not historical facts but instead represent only our belief regarding future
events, many of which, by their nature, are inherently uncertain and outside of
our control. It is possible that our actual results may differ, possibly
materially, from the anticipated results indicated in these forward-looking
statements. Important factors that could cause actual results to differ from
those in our specific forward-looking statements include, but are not limited
to, those contained under the caption "Risk Factors" in the prospectus forming
part of our registration statement on Form S-1 (File No. 333-84001). We hereby
incorporate by reference in this report those sections of the prospectus found
under the caption "Risk Factors," other than those sections found under the
sub-headings "--You will experience immediate and substantial dilution" and
"--Our management will have substantial discretion over the use of the proceeds
from this offering." In some cases, forward-looking statements can be identified
by terminology such as "may," "will," "should," "could," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
27.1 -- Financial Data Schedule for the Nine Months Ended
September 30, 1999.
27.2 -- Financial Data Schedule for the Nine Months Ended
September 30, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the period
covered by this report.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTHA STEWART LIVING OMNIMEDIA, INC.
By: /s/ Helen Murphy
------------------------------
Name: Helen Murphy
Title: Chief Financial and
Administrative Officer
(Duly Authorized Officer and
Principal Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
27.1 -- Financial Data Schedule for the Nine Months Ended
September 30, 1999.
27.2 -- Financial Data Schedule for the Nine Months Ended
September 30, 1998.
19
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
DESCRIPTION: FINANCIAL DATA SCHEDULE
ARTICLE 5
This schedule contains summary Financial Information extracted from the
Condensed Consolidated Balance Sheets at September 30, 1999 and the Condensed
Consolidated Statements of Operations for the nine months ended September 30,
1999 of Martha Stewart Living Omnimedia, Inc. and is qualified in its entirety
by reference to such financial statements.
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,884
<SECURITIES> 0
<RECEIVABLES> 28,964
<ALLOWANCES> 0
<INVENTORY> 8,354
<CURRENT-ASSETS> 73,920
<PP&E> 15,803
<DEPRECIATION> 0
<TOTAL-ASSETS> 142,503
<CURRENT-LIABILITIES> 56,621
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 76,215
<TOTAL-LIABILITY-AND-EQUITY> 142,503
<SALES> 0
<TOTAL-REVENUES> 161,340
<CGS> 82,794
<TOTAL-COSTS> 82,794
<OTHER-EXPENSES> 59,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 798
<INCOME-PRETAX> 18,580
<INCOME-TAX> 9,290
<INCOME-CONTINUING> 9,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,290
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.2
DESCRIPTION: FINANCIAL DATA SCHEDULE
ARTICLE 5
This schedule contains summary financial information extracted from the
financial statements for the nine months ended September 30, 1998 of Martha
Stewart Living Omnimedia, Inc. and is qualified in its entirety by reference to
such financial statements.
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,306
<SECURITIES> 0
<RECEIVABLES> 26,451
<ALLOWANCES> 0
<INVENTORY> 6,226
<CURRENT-ASSETS> 55,514
<PP&E> 11,496
<DEPRECIATION> 0
<TOTAL-ASSETS> 121,829
<CURRENT-LIABILITIES> 50,176
<BONDS> 27,650
0
0
<COMMON> 0
<OTHER-SE> 34,596
<TOTAL-LIABILITY-AND-EQUITY> 121,829
<SALES> 0
<TOTAL-REVENUES> 128,832
<CGS> 55,573
<TOTAL-COSTS> 55,573
<OTHER-EXPENSES> 48,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,769
<INCOME-PRETAX> 22,528
<INCOME-TAX> 10,926
<INCOME-CONTINUING> 11,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,602
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
</TABLE>
