<PAGE> 1
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, 2000
COMMISSION FILE NUMBER 001-15395
Martha Stewart Living Omnimedia, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-2187059
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11 West 42nd Street 10036
New York, NY (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (212) 827-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class November 10, 2000
<S> <C>
Class A, $0.01 par value 14,356,848
Class B, $0.01 par value 34,126,831
-----------------
Total 48,483,679
=================
</TABLE>
<PAGE> 2
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial information
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Part II. Other Information
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Index to Exhibits 18
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 118,876 $ 154,749
Accounts receivable, net 41,596 41,683
Inventories 13,131 6,163
Deferred television production costs 3,782 2,543
Other current assets 5,113 4,757
------------- -------------
Total current assets 182,498 209,895
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net 27,772 18,709
------------- -------------
INTANGIBLE ASSETS, net 47,945 50,157
------------- -------------
OTHER ASSETS 17,253 3,010
------------- -------------
Total assets $ 275,468 $ 281,771
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 49,878 $ 40,934
Current portion of deferred subscription income 29,851 26,938
------------- -------------
Total current liabilities 79,729 67,872
------------- -------------
DEFERRED SUBSCRIPTION INCOME 6,553 8,047
------------- -------------
OTHER NONCURRENT LIABILITIES 6,249 6,450
------------- -------------
Total liabilities 92,531 82,369
------------- -------------
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares
authorized; 14,352 and 15,484 shares outstanding
in 2000 and 1999, respectively 144 155
Class B common stock, $.01 par value, 150,000 shares
authorized; 34,127 outstanding in 2000 and 1999 341 341
Capital in excess of par value 161,274 193,081
Retained earnings 21,178 5,825
------------- -------------
Total shareholders' equity 182,937 199,402
------------- -------------
Total liabilities and shareholders' equity $ 275,468 $ 281,771
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Publishing $ 38,546 $ 31,654 $ 126,647 $ 104,968
Television 7,112 6,418 21,445 19,205
Merchandising 6,757 4,789 18,915 16,298
Internet/Direct Commerce 9,474 6,977 33,221 20,869
----------- ---------- ---------- ----------
Total revenues 61,889 49,838 200,228 161,340
----------- ---------- ---------- ----------
Operating costs and expenses
Production, distribution and editorial 34,396 28,084 107,040 82,794
Selling and promotion 9,689 7,547 32,226 27,541
General and administrative 10,279 8,533 31,111 27,134
Depreciation and amortization 2,325 1,761 6,761 4,493
----------- ---------- ---------- ----------
Total operating costs and expenses 56,689 45,925 177,138 141,962
----------- ---------- ---------- ----------
Income from operations 5,200 3,913 23,090 19,378
Interest income (expense), net 1,388 (201) 4,086 (798)
----------- ---------- ---------- ----------
Income before income taxes 6,588 3,712 27,176 18,580
Income tax provision 2,768 238 11,823 940
----------- ---------- ---------- ----------
Net income $ 3,820 $ 3,474 $ 15,353 $ 17,640
=========== ========== ========== ==========
Earnings per share
Basic $ 0.08 $ 0.31
=========== ==========
Diluted $ 0.08 (See Note) $ 0.31 (See Note)
=========== ==========
</TABLE>
Note
Reference is made to Note 3 to the Condensed Consolidated Financial Statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for information about earnings per share data. On a basis comparable
to the three and nine months ended September 30, 2000, basic and diluted
earnings per share for the three and nine month periods ended September 30, 1999
would have been $ 0.04 and $ 0.19, respectively.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
Martha Stewart Living Omnimedia, Inc.
Consolidated Statement of Shareholders' Equity
For the Nine Months Ended September 30, 2000
(unaudited, in thousands)
<TABLE>
<CAPTION>
Class A Class B
common stock common stock
----------------------- -----------------------
Capital in
excess of Retained
Shares Amount Shares Amount par value earnings Total
---------- ---------- ---------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 15,484 $ 155 34,127 $ 341 $ 193,081 $ 5,825 $ 199,402
Net income for the period - - - - - 15,353 15,353
Repurchase of shares (1,366) (14) - - (32,492) - (32,506)
Issuance of shares for stock option
exercises 234 3 - - 685 688
---------- ---------- ---------- ---------- ----------- ------------ ---------
Balance at September 30, 2000 14,352 $ 144 34,127 $ 341 $ 161,274 $ 21,178 $ 182,937
========== ========== ========== ========== =========== ============ =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 15,353 $ 17,640
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 6,761 4,493
Changes in operating assets and liabilities 706 (7,341)
------------ ------------
Net cash provided by operating activities 22,820 14,792
------------ ------------
Cash flows from investing activities
Equity investment (13,297) -
Capital expenditures (13,578) (1,596)
------------ ------------
Net cash used in investing activities (26,875) (1,596)
------------ ------------
Cash flows from financing activities
Repurchase of common stock (32,506) -
Proceeds received from stock option exercises 688 -
Issuance of equity - 25,000
Principal repayment of long term debt - (27,650)
Distributions to members - (3,240)
------------ ------------
Net cash used in financing activities (31,818) (5,890)
------------ ------------
Net increase (decrease) in cash (35,873) 7,306
Cash and cash equivalents, beginning of period 154,749 24,578
------------ ------------
Cash and cash equivalents, end of period $ 118,876 $ 31,884
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
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. These condensed consolidated financial statements are unaudited and
should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission with respect to its fiscal year ended
December 31, 1999.
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
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS
109, deferred assets and liabilities are recognized for the future costs
and benefits attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases.
Prior to the Company's conversion to a C corporation as a result of its
merger with MSLO on October 22, 1999, no provision had 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.
7
<PAGE> 8
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
2. Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Paper $ 7,415 $ 3,465
Catalog merchandise 5,716 2,698
------------- ------------
$ 13,131 $ 6,163
============= ============
</TABLE>
3. Earnings per share
Earnings per share are computed in accordance with SFAS No. 128, "Earnings
Per Share". Basic earnings per share are calculated by dividing net income
by the weighted-average number of common shares outstanding during each
period. Diluted earnings per share include the determinants of basic
earnings per share and, in addition, give effect to dilutive potential
common shares.
The computations of basic and diluted earnings per share for the three
months and nine months ended September 30, 2000 are set forth below:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
2000 2000
------------- -------------
<S> <C> <C>
Numerator for basic and diluted earnings per share-
net income available to common shareholders $ 3,820 $ 15,353
------------- -------------
Denominator for basic earnings per share- weighted
average number of common shares outstanding 48,365 48,752
Effect of dilutive securities- dilutive potential
common shares 2,376 1,576
------------- -------------
Denominator for diluted earnings per share-
weighted average number of common shares and
dilutive potential common shares 50,741 50,328
------------- -------------
Basic earnings per share $ 0.08 $ 0.31
------------- -------------
Diluted earnings per share $ 0.08 $ 0.31
------------- -------------
</TABLE>
8
<PAGE> 9
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
The Company became a "C" corporation on October 22, 1999. Prior thereto, it
operated as a limited liability company. Historical earnings per share have
not been presented for the three and nine month periods ended September 30,
1999, since prior to becoming a "C" corporation the Company had LLC
interests outstanding and no common shares outstanding. Furthermore,
historical earnings do not reflect income taxes that would have been
charged had the Company been a "C" corporation. The pro forma adjustment to
income tax provision below reflects the income taxes that would have been
recorded had the Company been a "C" corporation at January 1, 1999. Pro
forma weighted average common shares outstanding reflects the average
shares that would have been outstanding had the conversion to a "C"
corporation been done as of January 1, 1999.
Adjusted pro forma basic and diluted earnings per share for the three
months and nine months ended September 30, 1999 are calculated based upon
the number of common shares outstanding as if all common shares issued in
connection with the Company's initial public offering and the July 27, 1999
investment by Kleiner Perkins Caufield & Byers in the Company were
outstanding as of January 1, 1999 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.
The computations of pro forma and adjusted pro forma basic and diluted
earnings per share for the three months and nine months ended September 30,
1999 are set forth below:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
1999 1999
------------- -------------
<S> <C> <C>
Net income $ 3,474 $ 17,640
Pro forma adjustment to income tax provision (1,597) (8,350)
------------- -------------
Pro forma net income $ 1,877 $ 9,290
============= =============
Pro forma earnings per share- basic and diluted $ 0.05 $ 0.23
------------- -------------
Pro forma weighted average common shares
outstanding 40,619 39,657
------------- -------------
Adjusted pro forma earnings per share- basic and
diluted $ 0.04 $ 0.19
------------- -------------
Adjusted pro forma weighted average common
shares outstanding 49,583 49,583
------------- -------------
</TABLE>
4. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business
segments are Publishing, Television, Merchandising and Internet/Direct
Commerce. The Publishing segment primarily consists of the Company's
magazine operations, and also those related to its book, radio, newspaper
and music operations. The Television segment consists of the Company's
television production operations that produce television programming that
airs in syndication in the United States and on cable in the United States,
Canada and certain other international markets, weekly segments on CBS's
The Early Show broadcast, as well as periodic prime time specials. The
Merchandising segment consists of the Company's operations related to the
design of merchandise and related promotional and packaging materials that
are distributed by its retail and manufacturing partners in exchange for
royalty income. The Internet/Direct Commerce segment comprises the
Company's operations relating to the Martha by Mail catalog and the website
marthastewart.com.
9
<PAGE> 10
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
Revenues for each segment are presented in the condensed consolidated
income statements. Income from operations for each segment were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Publishing $ 13,132 $ 10,432 $ 46,902 $ 34,525
Television 663 198 3,311 1,956
Merchandising 6,701 4,686 18,753 16,117
Internet/Direct Commerce (5,680) (3,626) (17,091) (7,708)
------------ ------------ ------------ ------------
Total before corporate charges 14,816 11,690 51,875 44,890
Corporate (9,616) (7,777) (28,785) (25,512)
------------ ------------ ------------ ------------
Income from operations $ 5,200 $ 3,913 $ 23,090 $ 19,378
============ ============ ============ ============
</TABLE>
5. Equity Transactions
In March 2000, the Company repurchased 1.366 million shares of Class A
common stock from Time Publishing Ventures, Inc. at a purchase price of
$23.79 per share for a total consideration of $32.5 million. Concurrently,
Time's put and call rights relating to its remaining equity terminated. The
shares were retired upon repurchase.
6. Other Assets
Included in other assets at September 30, 2000 is a minority equity
investment of $13.3 million in BlueLight.com, an e-commerce company. The
investment is carried at cost.
7. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash paid for interest $ 145 $ 434 $ 508 $ 2,463
Cash paid for income taxes 1,891 198 8,961 683
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart
Living Omnimedia, Inc., and, unless the context requires otherwise, Martha
Stewart Living Omnimedia LLC ("MSLO"), 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, 2000 TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
(in thousands, except per
share amounts)
<S> <C> <C>
Revenues
Publishing $ 38,546 $ 31,654
Television 7,112 6,418
Merchandising 6,757 4,789
Internet/Direct Commerce 9,474 6,977
------------ ------------
Total revenues 61,889 49,838
------------ ------------
Operating costs and expenses
Production, distribution and editorial 34,396 28,084
Selling and promotion 9,689 7,547
General and administrative 10,279 8,533
Depreciation and amortization 2,325 1,761
------------ ------------
Total operating costs and expenses 56,689 45,925
------------ ------------
Income from operations 5,200 3,913
------------ ------------
Interest income (expense), net 1,388 (201)
------------ ------------
Income before income taxes 6,588 3,712
------------ ------------
Income tax provision 2,768 238
------------ ------------
Net income 3,820 3,474
------------ ------------
Pro forma adjustment to income tax provision - (1,597)
------------ ------------
Pro forma net income $ 3,820 $ 1,877
============ ============
Earnings per share- diluted $ 0.08
============
Adjusted pro forma earnings per share- diluted $ 0.04
============
</TABLE>
Revenues. Total revenues increased $12.1 million, or 24.2%, to $61.9 million for
the three months ended September 30, 2000, from $49.8 million for the three
months ended September 30, 1999. Publishing revenues increased $6.9 million, or
21.8%, to $38.5 million for the three months ended September 30, 2000, from
$31.7 million for the three months ended September 30, 1999. This increase was
primarily due to an increase in advertising pages sold in, and increased
newsstand sales of, Martha Stewart Living magazine, and revenues earned from the
initial publication of Martha Stewart Holiday- Halloween 2000 in September 2000.
Television revenues increased $0.7 million, or 10.8%, to $7.1 million for the
three months ended September 30, 2000, from $6.4 million for the three months
ended September 30, 1999. The increase is due primarily to additional revenues
associated with higher distribution of the second half hour of our Martha
Stewart Living program and revenues earned from our cable program, from Martha's
Kitchen, which began broadcasting in September 1999, partially offset by reduced
advertising revenues on the Martha Stewart Living program, due to lower ratings
during the three months ended September 30, 2000. Merchandising revenues
increased $2.0 million, or 41.1%, to $6.8 million for the three months ended
September 30, 2000, from $4.8 million for the three months ended September 30,
1999, primarily as a result of revenues earned on purchases of initial inventory
quantities of our Martha Stewart Everyday Kitchen product line. Internet/Direct
Commerce revenues increased $2.5 million, or 35.8%, to $9.5 million for the
three months ended September 30, 2000, from $7.0 million for the three months
ended September
11
<PAGE> 12
30, 1999, due to increased merchandise sales resulting from higher catalog
circulation, greater product offerings, increased Internet traffic and increased
advertising revenues.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $6.3 million, or 22.5%, to $34.4 million for the three months
ended September 30, 2000, from $28.1 million for the three months ended
September 30, 1999. Publishing segment costs increased $2.7 million reflecting
increased costs for Martha Stewart Living magazine due primarily to an increase
in the number of pages printed per issue and the publication of Martha Stewart
Holiday- Halloween 2000 in the third quarter. Internet/Direct Commerce costs
increased $3.3 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, costs increased due to increased investment in developing and
maintaining our Internet site. Television costs increased $0.3 million,
primarily as a result of higher distribution costs associated with revenues
received from the second half-hour of our syndicated daily program during the
three months ended September 30, 2000.
Selling and promotion. Selling and promotion expenses increased $2.1 million, or
28.4% to $9.7 million for the three months ended September 30, 2000, from $7.5
million for the three months ended September 30, 1999. Publishing segment costs
increased $1.5 million resulting from higher advertising and circulation costs
incurred to support higher revenues, including revenues from the publication of
Martha Stewart Holiday- Halloween 2000. Internet/Direct Commerce segment costs
increased $0.6 million resulting from higher costs associated with higher
revenues and increased promotion costs.
General and administrative. General and administrative expenses increased $1.7
million, or 20.5%, to $10.3 million for the three months ended September 30,
2000, from $8.5 million for the three months ended September 30, 1999. The
higher expenses have been incurred primarily as a result of higher occupancy
costs needed to support growth in headcount, as well as increased compensation
costs and costs associated with our becoming a public company in October 1999.
Depreciation and amortization. Depreciation and amortization increased $0.6
million, or 32.0% to $2.3 million for the three months ended September 30, 2000,
from $1.8 million for the three months ended September 30, 1999. The increase is
attributable to higher levels of property and equipment.
Interest income (expense), net. Interest income (expense), net was $1.4 million
for the three months ended September 30, 2000, compared to interest expense of
$0.2 million for the three months ended September 30, 1999. Interest income for
the three months ended September 30, 2000 resulted from higher cash balances
primarily related to the proceeds received from our initial public offering in
October 1999. During the three months ended September 30, 1999, we had
outstanding long term debt which resulted in interest expense in that period.
Such long term debt was fully repaid in July 1999.
Income tax provision. Income tax provision for the three months ended September
30, 2000 was $2.8 million, representing a 42% effective income tax rate. Income
tax provision for the three months ended September 30, 1999 was $0.2 million.
During the three months ended September 30, 1999, we operated as a limited
liability company and were therefore not subject to Federal income tax on our
earnings. In connection with our initial public offering in October 1999, we
became a "C" corporation and accordingly our earnings became subject to income
taxes from that date forward. The pro forma adjustment to income tax provision
of $1.6 million reflects the additional taxes that would have been incurred had
we been a "C" corporation during that time. The effective income tax rate during
the three months ended September 30, 2000 was lower than the pro forma effective
income tax rate for the three months ended September 30, 1999 due primarily to
tax exempt interest earned during the 2000 quarter.
Net income. Net income was $3.8 million for the three months ended September 30,
2000, compared to pro forma net income of $1.9 million for the three months
ended September 30, 1999, as a result of the above mentioned factors.
Earnings per share. Earnings per share- diluted was $0.08 per share for the
three months ended September 30, 2000. Adjusted pro forma earnings per share for
the three months ended September 30, 1999 of $ 0.04 has been computed on a pro
forma basis assuming we had been a "C" corporation at January 1, 1999, and the
shares issued in connection with our initial public offering and the July 27,
1999 investment by Kleiner Perkins Caufield & Byers in MSLO were outstanding as
of January 1, 1999, in order to better reflect comparability between periods.
12
<PAGE> 13
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------ ------------
(in thousands, except per
share amounts)
<S> <C> <C>
Revenues
Publishing $ 126,647 $ 104,968
Television 21,445 19,205
Merchandising 18,915 16,298
Internet/Direct Commerce 33,221 20,869
------------ ------------
Total revenues 200,228 161,340
------------ ------------
Operating costs and expenses
Production, distribution and editorial 107,040 82,794
Selling and promotion 32,226 27,541
General and administrative 31,111 27,134
Depreciation and amortization 6,761 4,493
------------ ------------
Total operating costs and expenses 177,138 141,962
------------ ------------
Income from operations 23,090 19,378
------------ ------------
Interest income (expense), net 4,086 (798)
------------ ------------
Income before income taxes 27,176 18,580
------------ ------------
Income tax provision 11,823 940
------------ ------------
Net income 15,353 17,640
------------ ------------
Pro forma adjustment to income tax provision - (8,350)
------------ ------------
Pro forma net income $ 15,353 $ 9,290
============ ============
Earnings per share- diluted $ 0.31
============
Adjusted pro forma earnings per share- diluted $ 0.19
============
</TABLE>
Revenues. Total revenues increased $38.9 million, or 24.1%, to $200.2 million
for the nine months ended September 30, 2000, from $161.3 million for the nine
months ended September 30, 1999. Publishing revenues increased $21.7 million, or
20.7%, to $126.6 million for the nine months ended September 30, 2000, from
$105.0 million for the nine months ended September 30, 1999. This increase was
primarily due to an increase in advertising pages sold in, and higher newsstand
sales of, Martha Stewart Living magazine, as well as the publication of Martha
Stewart Baby in March 2000 and the initial publication of Martha Stewart
Holiday- Halloween 2000 in September 2000. Television revenues increased $2.2
million, or 11.7%, to $21.4 million for the nine months ended September 30,
2000, from $19.2 million for the nine months ended September 30, 1999. The
increase is due primarily to additional revenues associated with higher
distribution of the second half hour of our Martha Stewart Living program and
revenues earned from our cable program from Martha's Kitchen, which began
broadcasting in September 1999, partially offset by reduced advertising revenues
on the Martha Stewart Living program due to lower ratings during the nine months
ended September 30, 2000. Merchandising revenues increased $2.6 million, or
16.1%, to $18.9 million for the nine months ended September 30, 2000, from $16.3
million for the nine months ended September 30, 1999, primarily as a result of
revenues earned on purchases of initial inventory quantities of our Martha
Stewart Everyday Kitchen product line, as well as increased revenues earned from
our Martha Stewart Everyday Garden product line, which had its full product
rollout in Spring 2000. Merchandising revenues increased 29.8% excluding $1.7
million in revenues earned during the nine months ended September 30, 1999 from
an adjustment to revenues earned in prior years. Internet/Direct Commerce
revenues increased $12.4 million, or 59.2%, to $33.2 million for the nine months
ended September 30, 2000, from $20.9 million for the three months ended
September 30, 1999, due to increased merchandise sales resulting from higher
catalog circulation, greater product offerings, increased Internet traffic and
increased advertising revenues.
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Production, distribution and editorial. Production, distribution and editorial
expenses increased $24.2 million, or 29.3%, to $107.0 million for the nine
months ended September 30, 2000, from $82.8 million for the nine months ended
September 30, 1999. Internet/Direct Commerce costs increased $16.9 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, costs increased due to
our continued investment in developing and maintaining our Internet site.
Publishing segment costs increased $6.6 million reflecting increased costs for
Martha Stewart Living magazine due primarily to an increase in the number of
pages printed per issue and additional costs associated with the publication of
Martha Stewart Baby and Martha Stewart Holiday- Halloween 2000. Television costs
increased $0.7 million, primarily as a result of higher distribution costs
associated with revenues received from the second half-hour of our Martha
Stewart Living program and the effect of the contract relating to from Martha's
Kitchen, resulting in decreased amortization of production costs during the nine
months ended September 30, 1999.
Selling and promotion. Selling and promotion expenses increased $4.7 million, or
17.0%, to $32.2 million for the nine months ended September 30, 2000, from $27.5
million for the nine months ended September 30, 1999. Publishing segment costs
increased $2.7 million resulting from circulation costs incurred to support
higher circulation revenues, including revenues from the publication of Martha
Stewart Holiday- Halloween 2000 and Martha Stewart Baby. Internet/Direct
Commerce segment costs increased $2.0 million resulting from higher costs
associated with higher revenues and increased promotion spending.
General and administrative. General and administrative expenses increased $4.0
million, or 14.7%, to $31.1 million for the nine months ended September 30,
2000, from $27.1 million for the nine months ended September 30, 1999. The
higher expenses have been incurred primarily as a result of higher occupancy
costs needed to support growth in headcount, as well as increased compensation
costs and costs associated with our becoming a public company in October 1999.
Depreciation and amortization. Depreciation and amortization increased $2.3
million, or 50.5% to $6.8 million for the nine months ended September 30, 2000,
from $4.5 million for the nine months ended September 30, 1999. The increase is
attributable to higher levels of property and equipment.
Interest income (expense), net. Interest income (expense), net was $4.1 million
for the nine months ended September 30, 2000, compared to interest expense of
$0.8 million for the nine months ended September 30, 1999. Interest income for
the nine months ended September 30, 2000 resulted from higher cash balances
primarily related to the proceeds received from our initial public offering in
October 1999. During the nine months ended September 30, 1999, we had
outstanding long term debt which resulted in interest expense in that period.
Such long-term debt was fully repaid in July 1999.
Income tax provision. Income tax provision for the nine months ended September
30, 2000 was $11.8 million, representing a 43.5% effective income tax rate.
Income tax provision during the nine months ended September 30, 1999 was $0.9
million. During the nine months ended September 30, 1999, we operated as a
limited liability company and were therefore not subject to Federal income tax
on our earnings. In connection with our initial public offering in October 1999,
we became a "C" corporation and accordingly our earnings became subject to
income taxes from that date forward. The pro forma adjustment to income tax
provision of $8.4 million reflects the additional taxes that would have been
provided had we been a "C" corporation during that time. The effective income
tax rate during the nine months ended September 30, 2000 was lower than the pro
forma effective income tax rate for the nine months ended September 30, 1999 due
primarily to tax exempt interest earned during the 2000 period.
Net income. Net income was $15.4 million for the nine months ended September 30,
2000, compared to pro forma net income of $9.3 million for the nine months ended
September 30, 1999, as a result of the above mentioned factors.
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Earnings per share. Earnings per share-diluted were $0.31 per share for the nine
months ended September 30, 2000. Earnings per share-diluted for the nine months
ended September 30, 1999 of $ 0.19 has been computed on a pro forma basis
assuming we had been a "C" corporation at January 1, 1999 and the shares issued
in connection with our initial public offering and the July 27, 1999 investment
by Kleiner Perkins Caufield & Byers in MSLO were outstanding as of January 1,
1999, in order to better reflect comparability between periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $118.9 million at September 30, 2000, compared to
$154.7 million at December 31, 1999.
Cash flows from operating activities were $22.8 million during the nine months
ended September 30, 2000 compared to $14.8 million during the nine months ended
September 30, 1999, resulting primarily from net income for the period.
Cash flows used in investing activities were $26.9 million for the nine months
ended September 30, 2000, reflecting a $13.3 million equity investment in
BlueLight.com, an e-commerce company, and $13.6 million in capital expenditures
for property and equipment. Cash flows used in investing activities were $1.6
million during the nine months ended September 30, 1999, representing capital
expenditures for property and equipment. We expect capital expenditures to
approximate $25 million in 2000, as we expand our facilities to provide for
future growth and continue to invest in our technology infrastructure. We
expect capital expenditures to decline to approximately $10-$12 million in 2001.
Cash flows used in financing activities for the nine months ended September 30,
2000 were $31.8 million. In March 2000, we repurchased 1.366 million shares of
our Class A common stock for $32.5 million from Time Publishing Ventures, Inc.
Cash used in financing activities was $5.9 million during the nine months ended
September 30, 1999, representing the repayment of $27.7 million of outstanding
long-term debt payable to Time Publishing Ventures, Inc. with the proceeds
received from a $15 million term loan from Bank of America and existing cash
balances. The amount outstanding under the loan was repaid in July 1999 with the
net proceeds of $25.0 million received from Kleiner Perkins Caufield & Byers, a
venture capital firm, for a 5% equity investment in MSLO.
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, 2000, we had no outstanding borrowings
under this facility.
We believe that our available cash balances, together with any cash generated
from operations and any funds available under existing credit facilities will be
sufficient to meet our operating and recurring cash needs for foreseeable
periods.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, Martha Stewart Living magazine will be published eleven times in
2000: three issues in each of the first, second and fourth quarters and two
issues in the third quarter. In 2001, Martha Stewart Living magazine will be
published twelve times. 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, we periodically publish special interest
publications, such as Martha Stewart Baby and Martha Stewart Holiday.
Furthermore, the number of advertising pages per issue tends 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 the broadcast of prime time television specials.
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 and the seasonal nature of certain products.
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PART II: OTHER INFORMATION
ITEM 5: OTHER INFORMATION
Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of
1995
We have included in this Quarterly Report certain "forward looking statements"
as that term is defined in The Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but instead represent
only our belief regarding future events, many of which, by their nature, are
inherently uncertain and outside of our control. It is possible that our actual
results may differ, possibly materially, from the anticipated results indicated
in these forward-looking statements. These statements can be identified by
terminology such as "may," "will," "should," "could," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "potential" or "continue" or
the negative of these terms or other comparable terminology. Our actual results
may differ materially from those projected in these statements, and factors that
could cause such differences include, but are not limited to, downturns in
national and/or local economies; a softening of the domestic advertising market;
increased consolidation among major advertisers or other events depressing the
level of advertising spending; changes in consumer reading, purchasing and/or
television viewing patterns; increases in paper, postage or printing costs;
technological developments affecting products or methods of distribution such as
the Internet or e-commerce; the resolution of issues concerning commercial
activities via the Internet, including security, privacy, reliability, cost,
ease of use and access and sales taxes; changes in government regulations
affecting our industries; and unexpected changes in interest rates.
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, 2000.
(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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTHA STEWART LIVING OMNIMEDIA, INC.
Date: November 13, 2000 By: /s/ Helen Murphy
-------------------------------------------
Name: Helen Murphy
Title: Chief Financial and Administrative
Officer
(Duly Authorized Officer and
Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
27.1 Financial Data Schedule for the Nine Months
Ended September 30, 2000.
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