Martha Stewart Living Omnimedia 10-K 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2010
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)
Registrants telephone number, including area code: (212) 827-8000
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the number of shares outstanding and using the price at which the stock was last sold on June 30, 2010, was $130,482,564.*
Number of Shares Outstanding As of March 10, 2011
29,014,627 shares of Class A Common Stock
26,067,961 shares of Class B Common Stock
Documents Incorporated by Reference.
Portions of Martha Stewart Living Omnimedia, Inc.s Proxy Statement for
Its 2011 Annual Meeting of Stockholders are Incorporated
by Reference into Part III of This Report.
TABLE OF CONTENTS
In this Annual Report on Form 10-K, the terms we, us, our, MSO and the Company 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 many of the businesses we now operate, and their respective subsidiaries.
All statements in this Annual Report on Form 10-K, except to the extent describing historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent 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 those factors discussed in Risk Factors in Item 1A of this Annual Report on Form 10-K and those discussed in the Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7, as well as other factors. Forward-looking statements herein speak only as of the date of filing of this Annual Report on Form 10-K. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in the reports we file with the Securities and Exchange Commission (the SEC).
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and well-designed, high-quality products. We are organized into three business segments with Publishing and Broadcasting representing our media segments that are complemented by our Merchandising segment, a combination that enables us to cross-promote our content and products.
Our growth strategy is three-pronged:
The media and merchandise we create generally encompass the following core areas:
As of March 1, 2011, we had approximately 615 employees. Our revenues from foreign sources were $6.5 million, $10.8 million and $13.4 million in 2010, 2009 and 2008, respectively, which were largely comprised of international sales of television content. In the future, we plan to grow international revenues from other areas of our business. Substantially all of our assets are located within the United States.
Martha Stewart published her first book, Entertaining, in 1982. Over the next eight years she became a well-known authority on the domestic arts, authoring eight more books on a variety of our core content areas. In 1990, Time Publishing Ventures, Inc. (TPV), a subsidiary of Time Inc., launched Martha Stewart Living magazine with Ms. Stewart serving as its editor-in-chief. In 1993, TPV began producing a weekly television program, Living, hosted by Ms. Stewart. In 1995, TPV launched a mail-order catalog, Martha by Mail, which made available products featured in, or developed in connection with, the magazine and television program. In late 1996 and early 1997, a series of transactions occurred resulting in MSLO LLC acquiring substantially all Martha Stewart-related businesses. Ms. Stewart was the majority owner of MSLO LLC; TPV retained a small equity interest in the business. On October 22, 1999, MSLO LLC merged into MSO, then a wholly owned subsidiary of MSLO LLC. Immediately following the merger, we consummated an initial public offering.
Our three business segments are described below. Additional financial information relating to these segments may be found in Note 16, Business Segments, in the Notes to Consolidated Financial Statements.
In 2010, we announced our plan to report a new Publishing segment which encompasses our print and digital distribution platforms that were previously reported in our Publishing and Internet segments. We have been continuing to execute our strategy to leverage our core content across our print and digital platforms more efficiently by further centralizing the creative process. In addition, during the fourth quarter of 2010, we reorganized our advertising sales force to centralize selling efforts across all media. As a result of these fundamental changes in the way we view our business, we evaluated our operating segments and determined that the print and digital platforms no longer met the definition of separate operating segments in accordance with Accounting Standards Codification 280, Segment Reporting. The new Publishing operating segment provides management with a more meaningful assessment of the operating performance of our print and digital platforms. All discussions of the Publishing operating segment, as well as Publishing segment financial information contained in Note 16, Business Segments, in the Notes to Consolidated Financial Statements, have been restated to reflect the results of the new Publishing operating segment.
In 2010, our Publishing segment accounted for 63% of our total revenues, consisting of operations related to magazine and book publishing and digital distribution, principally through our website, marthastewart.com. Revenues from magazine and digital advertising represented approximately 66% of the segments revenues in 2010, while circulation revenues represented approximately 32% of the segments revenues.
Martha Stewart Living. Our flagship magazine, Martha Stewart Living, is the foundation of our publishing business. Launched in 1990 as a quarterly publication with a circulation of 250,000, we currently publish Martha Stewart Living on a monthly basis with a rate base of 2.05 million, effective with the January 2011 issue. The magazine appeals primarily to the college-educated woman between the ages of 25 and 54 who owns her principal residence. Martha Stewart Living offers lifestyle ideas and original how-to information in a highly visual, upscale editorial environment. The magazine has won numerous prestigious industry awards and generates a majority of our magazine revenues, primarily from advertising revenue.
Martha Stewart Weddings. We launched Martha Stewart Weddings in 1994, originally as an annual publication. In 1997, it went to semi-annual publication and became a quarterly in 1999. Martha Stewart Weddings targets the upscale bride and serves as an important vehicle for introducing young women to our brands. Martha Stewart Weddings is distributed primarily through newsstands. In addition to quarterly publications, we have issued special publications including, most recently, Martha Stewart Weddings Destination Weddings and Dream Honeymoons, which was on sale in the fourth quarter of 2010.
Everyday Food. We launched Everyday Food in September 2003 after publishing four test issues. This digest-sized magazine featuring quick, easy recipes was created for the supermarket shopper and the everyday cook. Everyday Food targets women ages 25 to 49 and is intended to broaden our consumer audience while developing a new brand and diversifying our revenue.
Whole Living. In August 2004, we acquired certain assets and liabilities of Body + Soul magazine and Dr. Andrew Weils Self Healing newsletter (Body & Soul Group), publications featuring natural living content. In 2010, we discontinued our relationship with Dr. Andrew Weil and no longer publish Dr. Andrew Weils Self Healing newsletter or any Dr. Weil special interest publications. Effective with the June 2010 issue, we changed the name of Body + Soul/Whole Living magazine to Whole Living in an attempt to more effectively
integrate with our corresponding website, wholeliving.com, and to broaden the editorial coverage of the magazine, which we believe may provide opportunities to increase consumer and advertising demand.
Certain information related to our subscription magazines is as follows:
Special Interest Publications. In addition to our periodic magazines, we occasionally publish special interest magazine editions. Our special interest publications provide in-depth advice and ideas around a particular topic in one of our core content areas, allowing us to leverage our distribution network to generate additional revenues. Our special interest publications are sold at newsstands and may include advertising. In 2010, we published the Martha Stewart Living Halloween Special and the Martha Stewart Holiday Special.
Magazine Production, Distribution and Fulfillment. We print most of our domestic magazines under agreements with R. R. Donnelly and currently purchase paper through an agreement with Time Inc. As paper prices decreased in 2009 and 2010 because of lower market demand, the paper mills consolidated operations in response to the declining paper demand. We expect paper pricing to increase in 2011 due to the consolidation of the paper mills along with increased costs of raw materials, energy and fuel. We also expect our costs for magazine distribution to be higher in 2011 due to higher fuel costs. We use no other significant raw materials in our businesses. Newsstand distribution of the magazines is handled by Time Warner Retail Sales and Marketing (TWRSM), an affiliate of Time Inc., under an agreement that expires in June 2014. Subscription fulfillment services for our magazines are provided by Time Customer Service, another affiliate of Time Inc., under an agreement that expires in June 2014.
In the second quarter of 2007, we announced a multi-year agreement with Clarkson Potter/Publishers to publish 10 Martha Stewart branded books. Subsequent amendments ultimately increased the number of books to be delivered to 17, of which 14 have been delivered and accepted through December 31, 2010. We are currently in negotiations for a new multi-year, multi-book agreement and expect to continue providing Martha Stewart branded books in the future. In 2010, three books were published under this agreement Everyday FoodFresh Flavors Fast, Martha Stewarts Encyclopedia of Sewing & Fabric Crafts and Power Foods.
In August 2008, we announced a multi-year agreement with Harper Studio to publish 10 Emeril Lagasse branded books, of which 4 have been delivered and accepted through December 31, 2010. One book, Farm to Fork: Cooking Local, Cooking Fresh, was published under this agreement in 2010.
Through our efforts in the books business and the rights we acquired related to Emerils book backlist, we now have a library of approximately 80 books.
The marthastewart.com website is the flagship address of our digital properties, offering a vast quantity of continually updated articles and recipes developed from several Martha Stewart brands, including our magazine properties. Since the websites relaunch in 2007 as a content-focused, advertising-driven media website, marthastewart.com has received many industry awards. The website provides engaging experiences in several lifestyle categories: food, entertaining, holidays, home and garden, crafts and pets. The website also serves as a gateway to our other properties, including wholeliving.com and marthastewartweddings.com. In 2010, we invested in a replatforming of our website that will allow for additional functionality in 2011 and beyond. The enhancements to the website are expected to improve user engagement and expand our advertising inventory which, together, is expected to drive growth in our audience and revenues.
In 2008, we launched marthastewartweddings.com to guide brides-to-be through the planning and designing of their weddings, with a strong emphasis on identifying and developing each brides personalized wedding style.
In 2008, we also launched wholeliving.com, a website designed to help women achieve their goals for living better lives, with a focus on wellness and beauty, healthy recipes, green living, fitness, and personal happiness. In 2010, in conjunction with the change in title of the magazine Body + Soul/Whole Living to Whole Living, unique visitors to wholeliving.com doubled due to improvements in branding, product and programming and due to an increase in popularity of this lifestyle category overall.
In the first quarter of 2008, we entered into a series of transactions with WeddingWire to acquire approximately 43% of the equity in WeddingWire, a localized wedding platform that combines an online marketplace with planning tools and a social community. The addition of WeddingWires planning tool set to our site expands our weddings franchise and further builds our interactive community by adapting WeddingWires technology for other digital content areas.
In the fourth quarter of 2008, we entered into an agreement with pingg to acquire approximately 21% of the equity in pingg, an online invitation and event management site. Some of the most popular searches on marthastewart.com relate to entertaining, including baby and bridal showers, birthday parties and graduation parties. Visitors to the pingg site can conveniently create online invitations for their events by incorporating the beautiful imagery and photography for which the Martha Stewart brand is known.
In May 2009, we entered into an agreement with Ziplist to acquire a minority equity stake of approximately 10% of the equity in Ziplist, a company which provided us with the technology to power our Marthas Everyday Food App for the iPhone and Ipod touch. This application became available in the first quarter of 2010. Ziplist is a customizable, multiplatform digital grocery planning and shopping list service. Ziplist allows our customers to add any recipes ingredients to their grocery lists with one click and those lists can then be synced and shared online.
In 2010, we developed two digital apps that were available for purchase through Apple iTunes. One app was a digital magazine specifically designed for the Apple iPad subtitled Boundless Beauty which coincided with the 20th anniversary of the Martha Stewart Living magazine. The other app that launched in 2010 was our Cookie app for the iPad that included over 50 recipes, as well as built-in timers, grocery lists, videos and innovative search and organizing options.
Publishing is a highly competitive business. Our magazines, books and digital apps compete not only with other magazines, books and digital apps, but also with other mass media, websites and many other types of leisure-time activities. Competition for advertising dollars in magazine operations is primarily based on advertising rates, as well as editorial and aesthetic quality, the desirability of the magazines demographic, reader response to advertisers products and services and the effectiveness of the advertising sales staff. Martha Stewart Living competes for readers and advertising dollars with womens service, decorating, cooking and lifestyle magazines and websites. Everyday Food competes for readers and advertising dollars with womens service and cooking magazines and websites. Martha Stewart Weddings competes for readers and advertising dollars primarily with wedding service magazines and websites. Whole Living competes for readers and advertising dollars primarily with womens lifestyle, health, fitness, and natural living magazines and websites. Our special interest publications can compete with a variety of magazines depending on the focus of the particular issue. Capturing advertising sales for our digital properties is highly competitive as well. marthastewart.com competes with other how-to, food and lifestyle websites. Our challenge is to attract and retain users through an easy-to-use and content-relevant website. Competition for advertising rates is based on the number of unique users we attract each month, the demographic profile of that audience and the number of pages they view on our site.
Our Publishing segment can experience fluctuations in quarterly performance due to variations in the publication schedule from year to year, timing of direct mail expenses, delivery and acceptance of books under our long-term book contracts and variability of audience and traffic on marthastewart.com, as well as other seasonal factors. Not all of our magazines are published on a regularly scheduled basis throughout the year. For example, Martha Stewart Weddings was published five times in 2009: two issues in the second quarter and three issues in the fourth quarter. In 2010, Martha Stewart Weddings was also published five times, but in different quarters from 2009: one issue in each of the first, second, and third quarters; and two issues in the fourth quarter. Additionally, the publication schedule for our special interest publications can vary and lead to quarterly fluctuations in the Publishing segments results. Advertising revenue on marthastewart.com is typically highest in the fourth quarter of the year due to higher consumer demand in our holiday content areas, and corresponding higher advertiser demand to reach our audience demographic with their marketing messages.
Our Broadcasting business segment accounted for 18% of our total revenues in 2010. The segment consists of operations relating to the production of television programming, the domestic and international distribution of our library of programming in existing and repurposed formats, revenue derived from the provision of talent services, and the operations of our satellite radio channel. We generally own the copyrights in the programs we produce for television and radio distribution.
The Martha Stewart Show launched in September 2005 as a syndicated daily lifestyle series hosted by Martha Stewart and it generates the majority of the Broadcasting segments revenue. Filmed in front of a studio audience, the Emmy Award-winning show consists of several segments within each episode, featuring inspiring ideas and new projects from one or several of our core content areas. NBC Universal Domestic Television Distribution distributed the program domestically through season 5.
In 2010, we partnered with Hallmark Channel, a cable television network owned and operated by Crown Media Holdings, Inc., to exclusively televise original episodes of the The Martha Stewart Show that began with the launch of season 6 in September 2010. As part of the agreement, we also agreed to develop a range of new and original series and prime time specials, which now include Mad Hungry with Lucinda Scala Quinn, Martha Bakes and Petkeeping with Marc Morrone. We own the television content we produce for Hallmark Channel and we have the ability in the future to further monetize these assets. Similar to the agreement for syndicated distribution, revenues for The Martha Stewart Show on Hallmark Channel are mostly comprised of advertising, product integration and licensing revenues. Revenues for the companion programs on Hallmark Channel generally consist of licensing revenue.
In 2008, the Whatever Girls, a popular duo on the Martha Stewart Living Radio channel on Sirius XM Radio, debuted a television show called Whatever Martha!, which includes original commentary on classic clips of Living, a show we previously produced that ceased airing in September 2004. The first two series of Whatever Martha! aired on the Fine Living cable channel and the third series is expected to air on Hallmark Channel.
From 2005 to 2010, Everyday Food, a half-hour original series inspired by the magazine of the same name, aired weekly on PBS stations nationwide. Unlike revenues for The Martha Stewart Show, revenues for the Everyday Food series were provided by underwriters.
Emeril Lagasse provides various television services for us as part of our Broadcasting segment growth strategy. During 2008, we entered into an agreement with Discovery Talent Services LLC pursuant to which Emeril Lagasse provides talent services for the television series Emeril Green that airs daily on Discoverys Planet Green channel. In 2010, Emeril Lagasse hosted several new shows including a new, hour-long television series, The Emeril Lagasse Show, which was broadcast on ION Television. Fresh Food Fast, hosted by Emeril Lagasse on TVFNs new Cooking Channel, also began airing in 2010. This half-hour show features Chef Emeril Lagasse as he focuses on local produce and quick meals. In 2011, Emeril Lagasse is expected to host a new primetime show on the Cooking Channel, as well as a new cooking series that will be aired on Hallmark Channel.
In November 2009, we renewed our agreement with Sirius XM Radio for an additional two years. The Martha Stewart Living Radio channel launched on Sirius Satellite Radio, now known as Sirius XM Radio, in November 2005 providing programming 24 hours a day, seven days a week, of which 65 hours each week is original programming created by our experts.
Broadcasting is a highly competitive business. Overall competitive factors in this segment include programming content, quality and distribution as well as the demographic appeal of the programming. Competition for television and radio advertising dollars is based primarily on advertising rates, audience size and demographic composition, viewer response to advertisers products and services and effectiveness of the advertising sales staff. Our television programs compete directly for viewers, distribution and/or advertising dollars with other lifestyle and how-to television programs, as well as with general programming on other television stations and all other competing forms of media. Our radio programs compete for listeners with similarly themed programming on both satellite and terrestrial radio.
Our Broadcasting segment can experience fluctuations in quarterly performance due to, among other things, seasonal advertising patterns, seasonal influences on peoples viewing habits and audience increases for our programming during holiday seasons. Because television seasons run 12 months beginning and ending in the middle of September, the 2010 results include a large portion of season 5 of The Martha Stewart Show which aired in syndication and the first 16 weeks of season 6 of The Martha Stewart Show, which now airs on cable. While repeat episodes air over the summer, original episodes typically run September to May and generally command higher ratings and revenues.
Our Merchandising segment contributed 19% of our total revenues in 2010. The segment consists of operations related to the design of merchandise and related packaging, promotional and advertising materials, and the licensing of various proprietary trademarks, in connection with retail programs conducted through a number of retailers and manufacturers. Pursuant to agreements with our retail and manufacturing partners, we are typically responsible for the design of all merchandise and/or related packaging, signage, advertising and promotional materials. Our retail partners source the products through a manufacturer base and are mostly responsible for the promotion of the product. Our manufacturing partners source and/or produce the branded products together with other lines they make or sell. Our licensing agreements do not require us to maintain any inventory nor incur any meaningful expenses other than employee compensation. We own all trademarks for each of our branded merchandising programs and generally retain all intellectual property rights related to the designs of the merchandise, packaging, signage and collateral materials developed for the various programs.
Select Licensed Retail Partnerships
Martha Stewart Living at The Home Depot
In 2010, we launched the Martha Stewart Living program at The Home Depot, which is currently available at all of The Home Depots 1,976 stores in the United States and all of the 179 The Home Depot stores in Canada, as well as on homedepot.com and Home Decorators Collection catalog business. The Martha Stewart Living program at The Home Depot encompasses a broad range of home décor, seasonal and outdoor living products, including paint, storage and organization, outdoor furniture, garden seeds, wall-to-wall carpet, indoor and outdoor area rugs, drapery and drapery hardware, cabinetry, countertops, and seasonal holiday decor.
Martha Stewart Collection at Macys
In September 2007, we introduced the Martha Stewart Collection exclusively at Macys. It is currently available at the nearly 650 Macys stores in the United States that offer home products, as well as macys.com. The Martha Stewart Collection line encompasses a broad range of home goods, including bed and bath décor and textiles, housewares, food preparation and other kitchen items, tabletop, holiday decorating and trim-a-tree items.
Sandals® Weddings by Martha Stewart
In October 2009, we launched the Sandals® Weddings by Martha Stewart partnership with Sandals Resorts International. The exclusive line of Martha Stewart themed destination weddings is available at any of the 17 Luxury Included® Sandals Resorts and Beaches Resorts across the Caribbean.
Martha Stewart Flowers with 1-800-Flowers
In the second quarter of 2010, we announced the early termination of our agreement with 1-800-Flowers.com, our co-branded floral, plant and gift baskets program.
Martha Stewart Everyday at Kmart and Sears Canada
In the United States, we had an exclusive license agreement with Kmart Corporation in the mass-market channel that began in 1997 and ended in January 2010 and which provided for annual minimum royalties. In 2010, Kmart represented only 1% of total Company revenues, but represented approximately 10% of total Company revenues in each of 2008 and 2009. Kmarts contribution to both total Merchandising revenues and total Company revenues decreased materially from 2007 through 2010 mostly as the result of a decrease in the annual minimum royalties due from Kmart and the continued diversification of our business. In Canada, we had an exclusive license agreement with Sears Canada for Martha Stewart Everyday from September 2003 to August 2008.
Select Licensed Martha Stewart Manufacturing Partnerships
Martha Stewart Crafts
In May 2007, we launched Martha Stewart Crafts, a paper-based crafting program with our manufacturing partner, Wilton Properties Inc. (formerly UCG Paper Crafts Properties Inc. and EK Success, LTD), at Michaels stores in the United States. The program consists of tools, embellishments, paper/albums, and other seasonal products. Distribution for this program has expanded to include multiple specialty and independent craft chains in the United States and internationally.
In July, 2010 we expanded our Martha Stewart Crafts offerings by partnering with Provo Craft to launch the Cricut Cake® Martha Stewart Crafts Edition product, a cake decorating machine and electronic cutter that precisely cuts gum paste, frosting sheets, and more.
In 2011, we will be further expanding our Martha Stewart Crafts portfolio by introducing a line of craft paints with Plaid and a line of yarns and looms with Lion Brand.
Martha Stewart Pets with Age Group
In July 2010, we launched the Martha Stewart Pets line developed in partnership with Age Group Ltd and sold currently at Petsmart stores. The program consists of wide range of pet accessories, including apparel, collars, leashes, bedding, grooming supplies, toys and more.
KB Home / Martha Stewart Homes
We have had a partnership with KB Home for the development of Martha Stewart Homes since 2005 and have recently extended the term of our agreement. The KB Home communities created with Martha Stewart feature homes with unique exterior and interior details that are inspired by Martha Stewarts own homes. The Martha Stewart Homes are currently available at multiple communities in California, Colorado, North Carolina and Florida. We also offer a range of design options, featured exclusively at KB Home Studios nationwide.
Select Licensed Emeril Lagasse Manufacturing Partnerships
We acquired certain licensing agreements in connection with our April 2008 acquisition of specific Emeril Lagasse assets and have entered into new licensing agreements following the acquisition. These licensing agreements are primarily associated with partnerships with various food and kitchen preparation manufacturers that produce products under the Emeril Lagasse brand.
Emerilware by All-Clad
Introduced in August 2000, Emerilware by All-Clad consists of lines of high-quality, gourmet cookware and barbeque tools available at department stores and specialty retail outlets across the United States, as well as through the Home Shopping Network.
Emerilware by T-Fal
Launched in November 2006, Emerilware by T-FAL is a line of small kitchen appliances available at department stores and specialty retail outlets across the United States, as well as through the Home Shopping Network.
Emerils Original with B&G Foods
In September 2000, Emeril Lagasse introduced with B&G Foods, Emerils Original, a signature line of seasonings, salad dressings, basting sauces and marinades, mustards, salsas, pasta sauces, pepper sauces, spice rubs, cooking sprays and stocks available at supermarkets and specialty markets across the United States, as well as through the Home Shopping Network.
Emerils Gourmet Coffee with Timothys World Coffee
Launched in September 2007, Emerils Gourmet Coffee with Timothys World Coffee is a single-cup coffee program comprised of flavored coffees inspired by Emeril Lagasse. The program is available in department and specialty stores nationwide, as well as certain national hotel chains.
Other Emeril Manufacturing Partnerships
In 2010, we introduced a variety of new partnerships, including Emerilware Cutlery with Lehrhoff ABL Inc. Cutlery, which is a branded cutlery collection that includes knives and cutting boards. The line, which was launched on the Home Shopping Network in November 2010, is expected to be available in 2011 at select department stores and specialty stores across the United States. We also introduced Emerils Red Marble Steaks with Allen Brothers which is a line of hand-selected, aged steaks. The line, launched in the spring of 2010, is available through catalog, online and the Home Shopping Network. In addition, we announced a partnership with Viking Culinary Group, which will introduce a line of Gas and Charcoal Grills under the Emeril brand. This line is expected to launch in the spring of 2011 at specialty retailers across the United States and the Home Shopping Network.
The retail business is highly competitive and the principal competition for all of our merchandising lines consists of mass-market and department stores that compete with the mass-market, home improvement and department stores in which our Merchandising segment products are sold, including Bed Bath & Beyond, BJs, JC Penney, Kmart, Kohls, Lowes, Sams Club, Target and Wal-Mart. Our merchandising lines also compete within the mass-market, home improvement and department stores that carry our product lines with other products offered by these stores in the respective product categories. Competitive factors include numbers and locations of stores, brand awareness and price. We also compete with the internet businesses of these stores and other websites that sell similar retail goods.
Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of many product lines. In addition, prior to 2010, we historically recognized a substantial portion of 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 could be determined. Our Kmart agreement ended in January 2010.
We use multiple trademarks to distinguish our various publications and brands, including Martha Stewart Living (the name of our flagship publication as well as the trademark for products sold at Home Depot), Martha Stewart Collection (for goods sold Macys), Martha Stewart Crafts, Martha Stewart Weddings, Everyday Food, Whole Living, Mad Hungry, Emeril and Emerils. These and numerous other trademarks are the subject of registrations and pending applications filed by us for use with a variety of products and other content, both domestically and internationally, and we continue to expand our worldwide usage and registration of related trademarks. We also register, both offensively and defensively, key domain names containing our trademarks, such as www.marthastewart.com, www.marthastewartweddings.com, wholeliving.com, www.emerils.com and www.everydayfood.com.
We regularly file copyrights regarding our proprietary designs and editorial content on a regular basis. We have also applied for, and in some instances are now the owners of, domestic and international design and utility patents covering certain of our Martha Stewart Crafts paper punches.
We regard our rights in and to our trademarks, our proprietary designs and editorial content as valuable assets in the marketing of our products and we vigorously police and protect our trademarks against infringement and denigration by third parties. We also work with our licensees to assure that our trademarks are used properly. We own and license the rights to many of these marks pursuant to an agreement between us and Ms. Stewart, the description of which is incorporated by reference into Item 13 of this Annual Report on Form 10-K.
Our website can be found on the Internet at www.marthastewart.com. Our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to these documents, as well as certain other forms we file with or furnish to the SEC, can be viewed and downloaded free of charge as soon as reasonably practicable after they have been filed with the SEC by accessing www.marthastewart.com and clicking on Investor Relations and SEC Filings. Please note that information on, or that can be accessed through, our website is not deemed filed with the SEC and is not incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the Securities Act), or the Securities Exchange Act of 1934, as amended (the Exchange Act), irrespective of any general incorporation language contained in such filing.
Item 1A. Risk Factors
A wide range of factors could materially affect our performance. Like other companies, we are susceptible to macroeconomic changes that may affect the general economic climate and our performance, the performance of those with whom we do business, and the appetite of consumers for products and publications. Similarly, the price of our stock is impacted by general equity market conditions, the relative attractiveness of our market sector, differences in results of operations from estimates and projections, and other factors beyond our control. In addition to the factors affecting specific business operations identified in connection with the description of those operations and the financial results of those operations elsewhere in this report, the factors listed below could adversely affect our operations. Although the risk factors listed below are the risk factors that Company management considers significant, additional risk factors that are not presently known to Company management may also adversely affect our operations.
Our success depends in part on the popularity of our brands and the reputation and popularity of Martha Stewart, our Founder, and Emeril Lagasse. Any adverse reactions to publicity relating to Ms. Stewart or Mr. Lagasse, or the loss of either of their services, could adversely affect our revenues, results of operations and our ability to maintain or generate a consumer base.
While we believe there has been significant consumer acceptance for our products as stand-alone brands, the image, reputation, popularity and talent of Martha Stewart and Emeril Lagasse remain important factors.
Ms. Stewarts efforts, personality and leadership have been, and continue to be, critical to our success. While we have managed our business without her daily participation at times in the past, the repeated diminution or loss of her services due to disability, death or some other cause, or any repeated or sustained shifts in public or industry perceptions of her, would have a material adverse effect on our business.
In addition, in 2008 we acquired the assets relating to Emeril Lagasses businesses other than his restaurants and foundation. The value of these assets is largely related to the ongoing popularity and participation of Mr. Lagasse in the activities related to exploiting these assets. Therefore, the continued value of these assets could be materially adversely affected if Mr. Lagasse were to lose popularity with the public or be unable to participate in our business, forcing us potentially to write-down a significant amount of the value we paid for these assets.
Failure of the economy to sustain a recovery or difficulties in the financial markets could significantly impact our business, financial condition, results of operations and cash flows, and could adversely affect the value of our assets, hamper our ability to refinance our existing debt or our ability to raise additional funds.
The economy experienced extreme disruption in the second half of 2008 and during 2009, including extreme volatility in securities prices, severely diminished liquidity and a drastic reduction in credit availability. These events led to increased unemployment, declines in consumer confidence and declines in personal income and consumer spending, particularly discretionary income and spending. This economic downturn also resulted in extraordinary and unprecedented uncertainty and instability for many companies, across all industries, and severely impacted many of the companies with which we do business. We cannot predict the future health and viability of the companies with which we do business and upon which we depend for royalty revenues, advertising dollars and credit.
Although economic conditions have stabilized and shown some indications of improvement, it is difficult to judge the scope and sustainability of any general economic recovery. This makes it difficult for us to forecast consumer and product demand trends and companies willingness to spend money to advertise in our media properties. During the course of the recession, we experienced a decline in advertising revenues and a permanent reversal of that trend is not assured. An extended period of reduced cash flows could increase our need for credit at a time when such credit may not be available. Because of residual uncertainties regarding the economy, our operating results will be difficult to predict and prior results will not likely be indicative of results to be expected in future periods.
In addition, we have significant goodwill, intangible and other assets recorded on our balance sheet. We have already incurred impairment charges with respect to goodwill and certain intangible assets, and with respect to our investments. We will continue to evaluate the recoverability of the carrying amount of our goodwill, intangible and other assets on an ongoing basis, and we may in the future incur additional, and possibly substantial, impairment charges, which would adversely affect our financial results. Impairment assessment inherently involves the exercise of judgment in determining assumptions about expected future cash flows and the impact of market conditions on those assumptions. Although we believe the assumptions we have used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. Future events and changing market conditions may prove assumptions to be wrong with respect to prices, costs, holding periods or other factors. Differing results may amplify impairment charges in the future.
Our Merchandising business and licensing programs may suffer if health and stability of the general economy does not show continued improvement and durability or if the housing market fails to stabilize.
Our Merchandising business was hurt by the reduction in the availability of credit, downturn in the housing market, and other negative economic developments, including increased unemployment, that impacted the second half of 2008 and full year 2009. Each of these developments limited consumers discretionary spending and affected their confidence. These and other adverse consumer trends led to reduced spending on general merchandise, homes and home improvement projects categories in which we license our brands, resulting in weaker revenues from our licensed products. These trends affected the viability and financial health of companies with which we conduct business. While consumer spending and confidence have improved, consumer spending remains constrained. Unemployment remains and is expected to remain at high levels and the housing market remains weak and may in fact further deteriorate. If consumer confidence, consumer spending and the housing market do not rebound or companies with which we do business experience ongoing problems, our revenues may not grow.
Our business is largely dependent on advertising revenues in our Publishing and Broadcasting segments. The market for advertising was adversely affected by the economic downturn. Our failure to attract or retain advertisers would have a material adverse effect on our business.
We depend on advertising revenue in our Publishing and Broadcasting businesses. We cannot control how much or where companies choose to advertise. In the second half of 2008 and during 2009, we saw a significant downturn in advertising dollars generally in the marketplace, and more competition for the reduced dollars, which has hurt our publications and advertising revenues. Although this trend began to stabilize in the fourth quarter of 2009, our advertising revenues depend on the level of spending by advertisers, which is impacted by a number of factors beyond our control. If advertisers continue to spend less money, or if they advertise elsewhere in lieu of our magazines, websites or television and radio programming, our business and revenues will be materially adversely affected.
Acquiring or developing additional brands or businesses, and integrating acquired assets, poses inherent financial and other risks and challenges.
The process of consolidating and integrating acquired operations and assets takes a significant period of time, places a significant strain on resources and could prove to be more expensive and time consuming than we predicted. We may be required to increase expenditures to accelerate the integration process with the goal of achieving longer-term cost savings and improved profitability. We also may be required to manage multiple relationships with third parties as we expand our product offerings and brand portfolio. These developments may increase expenses if we hire additional personnel to manage our growth. These investments require significant time commitments from our senior management and place a strain on their ability to manage our existing businesses.
We continue to evaluate the acquisition of other businesses. These transactions involve challenges and risks in negotiation, execution, valuation, and integration. Moreover, competition for certain types of acquisitions is significant, particularly in the field of interactive media. Even if successfully negotiated, closed, and integrated, certain acquisitions may not advance our business strategy and may fall short of expected return on investment targets.
We are expanding our merchandising and licensing programs into new areas and products, the failure of any of which could diminish the perceived value of our brand, impair our ability to grow and adversely affect our prospects.
Our growth depends to a significant degree upon our ability to develop new or expand existing retail merchandising programs. We have entered into several new merchandising and licensing agreements in the past few years and have acquired new agreements through our acquisition of the Emeril Lagasse assets. Some of these agreements are exclusive and have a duration of many years. While we require that our licensees maintain the quality of our respective brands through specific contractual provisions, we cannot be certain that our licensees, or their manufacturers and distributors, will honor their contractual obligations or that they will not take other actions that will diminish the value of our brands. Furthermore, we cannot be certain that our licensees are not adversely impacted by general economic or market conditions, including continued weakness or further deterioration in the housing market and continued high levels of unemployment. If these companies experience financial hardship, they may be unwilling or unable to pay us royalties or continue selling our products, regardless of their contractual obligations.
There is also a risk that our extension into new business areas will meet with disapproval from consumers. We cannot guarantee that these programs will be fully implemented, or if implemented, that they will be successful. If the licensing or merchandising programs do not succeed, we may be prohibited from seeking different channels for our products due to the exclusive nature and multi-year terms of these agreements. Disputes with new or existing licensees may arise which could hinder our ability to grow or expand our product
lines. Disputes also could prevent or delay our ability to collect the licensing revenue that we expect in connection with these products. If such developments occur or our merchandising programs are otherwise not successful, the value and recognition of our brands, as well as our business, financial condition and prospects, could be materially adversely affected.
If The Martha Stewart Show fails to maintain a sufficient audience, if adverse trends continue or develop in the television production business generally, or if Martha Stewart were to cease to be able to devote substantial time to our television business, that business could be adversely affected. We also derive value from Emeril Lagasses television shows, the popularity of which cannot be assured.
Our television production business is subject to a number of uncertainties. Our business and financial condition could be materially adversely affected by:
Failure of our television programming to maintain a sufficient audience
Television production is a speculative business because revenues derived from television depend primarily upon the continued acceptance of that programming by the public, which is difficult to predict. Public acceptance of particular programming depends upon, among other things, the quality of that programming, the strength of the channel on which that programming is carried, promotion of that programming and the quality and acceptance of competing television programming and other sources of entertainment and information. The Martha Stewart Show television program has experienced a decline in ratings that reflects both the general decline in daytime cable television viewers discussed below and the transfer of the show from syndication to the Hallmark Channel. These developments have negatively impacted our television advertising revenues due to lower ratings as cable channels typically have smaller household universes of viewers from which to draw. The Martha Stewart Show is no longer available in broadcast-only homes, whose residents may have been a portion of the shows audience when it was in syndication. If ratings for the show were to further decline, it would adversely affect the advertising revenues we derive from television and could possibly make it economically inefficient to continue production of the show, in which case we would lose a significant marketing platform for us and our products, and we would have to write down our capitalized programming costs sooner. Additionally, a decline in ratings or cessation of The Martha Stewart Show would negatively impact our website, marthastewart.com, since the show is an important driver of audience to our website. The amount of any accelerated write down would vary depending on a number of factors, including when production ceased and the extent to which we continued to generate revenues from the use of our existing program library.
We are currently producing television shows featuring Emeril Lagasse. Emerils failure to maintain or build popularity could negatively impact his marketing platform and his products, as well as the loss of anticipated revenue and profits from his television shows.
Adverse trends in the television business generally
Television revenues may also be affected by a number of other factors, most of which are not within our control. These factors include a general decline in daytime television viewers, pricing pressure in the television advertising marketplace, the strength of the channel on which our programming is carried, general economic conditions, increases in production costs, availability of other forms of entertainment and leisure time activities and other factors. Any or all of these factors may quickly change, and these changes cannot be predicted with certainty. There has been a reduction in advertising dollars generally available and more competition for the reduced dollars across more media platforms. While we currently benefit from advertising revenues and the ability to sell product integrations on certain of our television programs, if adverse changes occur, we cannot be certain that we will continue to benefit from advertising revenues or able to sell product integrations or that our advertising rates can be maintained. Accordingly, if any of these adverse changes were to occur, the revenues we generate from television programming could decline.
We have placed emphasis on building an advertising-revenue-based website, dependent on a large consumer audience and resulting page views. Failure to fulfill these undertakings could adversely affect our brand and business prospects.
Our growth depends to a significant degree upon the continued development and growth of our digital properties. We have had failures with direct commerce in the past, and only limited experience in building an advertising-revenue-based website. When initial results from the relaunch of the marthastewart.com site in the second quarter of 2007 were below expectations, we made changes to the site and continue to enhance and upgrade the site including the recent 2010 initiative to replatform marthastewart.com. We cannot be certain that those changes will enable us to sustain growth for our website in the long term. In addition, the competition for advertising dollars has intensified. In order for our digital properties to succeed, we must, among other things maintain and continue to:
We cannot be certain that we will be successful in achieving these and other necessary objectives. If we are not successful in achieving these objectives, our business, financial condition and prospects could be materially adversely affected.
If we are unable to predict, respond to and influence trends in what the public finds appealing, our business will be adversely affected.
Our continued success depends on our ability to provide creative, useful and attractive ideas, information, concepts, programming, content and products that strongly appeal to a large number of consumers, as well as distributing the content through the latest technology and traditional channels. In order to accomplish this, we must be able to respond quickly and effectively to changes in consumer tastes for ideas, information, concepts, programming, technology, content and products. The strength of our brands and our business units depends in part on our ability to influence tastes through broadcasting, print publication, digital distribution and merchandising. We cannot be sure that our new ideas and content will have the appeal and garner the acceptance that they have in the past, or that we will be able to respond quickly to changes in the tastes of homemakers and other consumers and their appetite for new technology.
New product launches may reduce our earnings or generate losses.
Our future success will depend in part on our ability to continue offering new products and services that successfully gain market acceptance by addressing the needs of our current and future customers. Our efforts to introduce new products or integrate acquired products may not be successful or profitable. The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new product, or assimilating and marketing an acquired product, is both risky and costly. New products generally incur initial operating losses. Costs related to the development of new products and services are generally expensed as incurred and, accordingly, our profitability from year to year may be adversely affected by the
number and timing of new product launches. For example, we had a cumulative loss of $15.7 million in connection with Blueprint, which we ceased publishing in 2007. Other businesses and brands that we may develop also may prove not to be successful.
Our principal print business vendors are consolidating and this may adversely affect our business and operations.
We rely on certain principal vendors in the print portion of our Publishing segment and their ability or willingness to sell goods and services to us at favorable prices and other terms. Many factors outside our control may harm these relationships and the ability and willingness of these vendors to sell these goods and services to us on favorable terms. Our principal vendors include paper suppliers, printers, subscription fulfillment houses and national newsstand wholesalers, distributors and retailers. Each of these industries in recent years has experienced consolidation among its principal participants. Further consolidation may result in decreased competition, which may lead to greater dependence on certain vendors and increased prices; as well as interruptions and delays in services provided by such vendors, all of which could adversely affect our results of operations.
We may be adversely affected by fluctuations in paper, postage and distribution costs.
In our Publishing segment, our principal raw material is paper for the print portion of that business. Paper prices have fluctuated over the past several years. We generally purchase paper from major paper suppliers who adjust the price periodically. We have not entered, and do not currently plan to enter, into long-term forward price or option contracts for paper. Accordingly, significant increases in paper prices would adversely affect our future results of operations.
Postage for magazine distribution is also one of our significant expenses. We primarily use the U.S. Postal Service to distribute magazine subscriptions. In recent years, postage rates have increased, and a significant further increase in postage prices could adversely affect our future results of operations. We may not be able to recover, in whole or in part, paper or postage cost increases.
Distribution of magazines to newsstands and bookstores is conducted primarily through companies known as wholesalers. Wholesalers have in the past advised us that they intended to increase the price of their services. We have not experienced any material increase to date; however, some wholesalers have experienced credit and going concern risks. It is possible that other wholesalers likewise may seek to increase the price of their services or discontinue operations. An increase in the price of our wholesalers services could have a material adverse effect on our results of operations. The need to change wholesalers could cause a disruption or delay in deliveries, which could adversely impact our results of operations. Similarly, if distributors of our digital content successfully impose revenue-sharing arrangements, our results may be adversely impacted.
We may be adversely affected by a continued weakening of newsstand sales.
The magazine industry has seen a weakening of newsstand sales during the past few years. A continuation of this decline could adversely affect our financial condition and results of operations by further reducing our circulation revenue and causing us to either incur higher circulation expenses to maintain our rate bases, or to reduce our rate bases which could negatively impact our revenue.
We may be adversely affected by rebranding our Body + Soul/Whole Living publication.
Effective with the June 2010 issue, we changed the name of Body + Soul magazine to Whole Living in an attempt to more effectively integrate it with our corresponding website, wholeliving.com, and to broaden the editorial coverage of the magazine. Changing the product name and editorial coverage may diminish brand awareness which could adversely impact newsstand sales and the satisfaction of current subscribers, resulting in a reduction in subscription renewal rates.
Our websites and internal networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our operations and result in the theft of our and our users proprietary or personal information.
Our website activities involve the storage and transmission of proprietary information and personal information of our users, which we endeavor to protect from third party access. However, it is possible that unauthorized persons may be able to circumvent our protections and misappropriate proprietary or personal information or cause interruptions or malfunctions in our digital operations. We may be required to spend significant capital and other resources to protect against or remedy any such security breaches. Accordingly, security breaches could expose us to a risk of loss due to business interruption, or litigation and possible liability. Our security measures and contractual provisions attempting to limit our liability in these areas may not be successful or enforceable.
Martha Stewart controls our Company through her stock ownership, enabling her to elect our board of directors, and potentially to block matters requiring stockholder approval, including any potential changes of control.
Ms. Stewart controls all of our outstanding shares of Class B Common Stock, representing over 90% of our voting power. The Class B Common Stock has ten votes per share, while Class A Common Stock, which is the stock available to the public, has one vote per share. Because of this dual-class structure, Ms. Stewart has a disproportionately influential vote. As a result, Ms. Stewart has the ability to control unilaterally the outcome of all matters requiring stockholder approval, including the election and removal of our entire board of directors and any merger, consolidation or sale of all or substantially all of our assets, and the ability to control our management and affairs. While her 2006 settlement with the SEC bars Ms. Stewart for the five-year period ending in August 2011 from serving at the Company as a director, or as an officer with financial responsibilities, her concentrated control could, among other things, discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our businesses and stockholders.
Our intellectual property may be infringed upon or others may accuse us of infringing on their intellectual property, either of which could adversely affect our business and result in costly litigation.
Our business is highly dependent upon our creativity and resulting intellectual property. We are susceptible to others imitating our products and infringing our intellectual property rights. We may not be able to successfully protect our intellectual property rights, upon which we depend. In addition, the laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Imitation of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenues. If we are alleged to have infringed the intellectual property rights of another party, any resulting litigation could be costly, affecting our finances and our reputation. Litigation also diverts the time and resources of management, regardless of the merits of the claim. There can be no assurance that we would prevail in any litigation relating to our intellectual property. If we were to lose such a case, and be required to cease the sale of certain products or the use of certain technology or if we were forced to pay monetary damages, the results could adversely affect our financial condition and our results of operations.
A loss of the services of other key personnel could have a material adverse effect on our business.
Our continued success depends to a large degree upon our ability to attract and retain key management executives, as well as upon a number of key members of our creative staff. The loss of some of our senior executives or key members of our creative staff, or an inability to attract or retain other key individuals, could materially adversely affect us.
We operate in three highly competitive businesses: Publishing, Broadcasting and Merchandising, each of which subjects us to competitive pressures and other uncertainties.
We face intense competitive pressures and uncertainties in each of our three businesses.
Our magazines, books and related publishing products compete not only with other magazines, books and publishing products, but also with other mass media, websites, and many other types of leisure-time activities. We face significant competition from a number of print and website publishers, some of which have greater financial and other resources than we have, which may enhance their ability to compete in the markets we serve. As advertising budgets have diminished, the competition for advertising dollars has intensified. Competition for advertising revenue in publications is primarily based on advertising rates, the nature and scope of readership, reader response to the promotions for advertisers products and services, the desirability of the magazines demographic and the effectiveness of advertising sales teams. Other competitive factors in publishing include product positioning, editorial quality, circulation, price and customer service, which impact readership audience, circulation revenues and, ultimately, advertising revenues. Our websites compete with other how-to, food and lifestyle websites. Our challenge is to attract and retain users through an easy-to-use and content-relevant website. Competition for adverting is based on the number of unique users we attract each month, the demographic profile of that audience and the number of pages they view on our site. Because some forms of media have relatively low barriers to entry, we anticipate that additional competitors, some of which have greater resources than we do, may enter these markets and intensify competition.
Our television programs compete directly for viewers, distribution and/or advertising dollars with other lifestyle and how-to television programs, as well as with general programming and all other competing forms of media. Overall competitive factors in Broadcasting include programming content, quality and distribution, as well as the demographic appeal of the programming. Competition for television and radio advertising dollars is based primarily on advertising rates, audience size and demographic composition, viewer response to advertisers products and services and the effectiveness of the advertising sales staff. Our radio programs compete for listeners with similarly themed programming on both satellite and terrestrial radio.
Our Merchandising segment competitors consist of mass-market and department stores that compete with the mass-market, home improvement and department stores in which our Merchandising segment products are sold, including Bed Bath & Beyond, BJs, JC Penney, Kmart, Kohls, Lowes, Sams Club, Target, and Wal-Mart. Our merchandising lines also compete within the mass-market, home improvement and department stores that carry our product lines with other products offered by these stores in the respective product categories. We also compete with the internet businesses of these stores and other websites that sell similar retail goods.
Our failure to meet the competitive pressures in any of these segments could negatively impact our results of operations and financial condition.
Information concerning the location, use and approximate square footage of our principal facilities as of December 31, 2010, all of which are leased, is set forth below:
The lease for our television production facilities at 221 West 26th Street and our executive and administrative office for television production at 226 West 26th Street expired in 2010 and is currently in the process of being negotiated for renewal. The other leases for these offices and facilities expire between 2012 and 2018, and some of these leases are subject to our renewal. In 2009, we consolidated certain of our offices by relocating our principal executive and administrative offices, as well as a portion of our Publishing segment offices and advertising sales offices from 11 West 42nd Street to 601 West 26th Street. We entered into a sublease agreement in 2008 for a portion of our office space at 11 West 42nd Street; we vacated that office space in March 2009.
We also have an intangible asset agreement for various properties owned by Martha Stewart for our editorial, creative and product development processes. These living laboratories allow us to experiment with new designs and new products, such as garden layouts, help generate ideas for new content available to all of our media outlets and serve as locations for photo spreads and television segments. The description of this intangible asset agreement is incorporated by reference into Item 13 and disclosed in the related party transaction disclosure in Note 12, Related Party Transactions, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
We believe that our existing facilities are well maintained and in good operating condition.
We are 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.
Market for the Common Stock
Our Class A Common Stock is listed and traded on The New York Stock Exchange (the NYSE). Our Class B Common Stock is not listed or traded on any exchange, but is convertible into Class A Common Stock at the option of its owner on a share-for-share basis. The following table sets forth the high and low sales price of our Class A Common Stock as reported by the NYSE for each of the periods listed.
As of March 2, 2011, there were 8,207 record holders of our Class A Common Stock and one record holder of our Class B Common Stock. This does not include the number of persons whose stock is in nominee or street name accounts through brokers.
We do not pay regular quarterly dividends.
Our term loan agreement with Bank of America contains certain covenants that limit our ability to pay dividends to an amount (combined with repurchases) no greater than $30 million during the term of the loan agreement, provided no event of default exists or would result and we would be in pro forma compliance with our financial covenants. See Note 7, Credit Facilities, in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities and Use of Proceeds
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 December 31, 2010:
Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act or the Exchange Act, the following performance graph shall not be deemed to be incorporated by reference into any such filings.
The following graph compares the performance of our Class A Common Stock with that of the Standard & Poors 500 Stock Index (S&P 500 Composite Index) and the stocks included in the Media General Financial Services database under the Standard Industry Code 2721 (Publishing-Periodicals) (the SIC Code Index*) during the period commencing on January 1, 2006 and ending on December 31, 2010. The graph assumes that $100 was invested in each of our Class A Common Stock, the S&P 500 Composite Index and the SIC Code Index at the beginning of the relevant period, is calculated as of the end of each calendar month and assumes reinvestment of dividends. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
The information set forth below for the five years ended December 31, 2010 is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto incorporated by reference into Item 8 of this Annual Report on Form 10-K. The Notes to Selected Financial Data below include certain factors that may affect the comparability of the information presented below (in thousands, except per share amounts).
NOTES TO SELECTED FINANCIAL DATA
(Loss) / income from continuing operations
2010 results include the recognition of substantially all of the exclusive license fee of approximately $5.0 million from Hallmark Channel for a significant portion of our library of programming, as well as licensing revenue for other new programming delivered to the Hallmark Channel.
2009 results include a net benefit to operating loss of approximately $20 million from certain items including the revenue from Kmart of $14.5 million, the recognition of previously deferred Kmart royalties of $10.0 million as non-cash revenue, an incremental $3.9 million from the conclusion of our relationship with TurboChef, a $3.0 million cash receipt related to a make-whole payment and a non-cash impairment charge of $11.4 million related to a cost-based equity investment in United Craft MS Brands LLC recorded in the Merchandising segment.
2008 results include revenues from Kmart of $23.8 million, as well as a $9.3 million non-cash goodwill impairment charge recorded in the Publishing segment.
2007 results include revenues from Kmart of $64.3 million, as well as non-cash equity compensation expense of $6.0 million due to the vesting of the final warrant granted to Mark Burnett in connection with the production of The Martha Stewart Show.
2006 results include a net benefit to operating income of approximately $48 million from certain items including revenues from Kmart of $56.0 million, a one-time newsstand expense reduction adjustment of $3.2 million related to the settlement of certain newsstand-related fees recorded in our Publishing segment, a favorable dispute resolution with a former merchandising licensee of $2.5 million in income, royalty income of $2.8 million related to the successful termination of a home video distribution agreement recorded in our Broadcasting segment, non-cash equity compensation expense of $2.3 million resulting from the vesting of shares underlying a warrant granted to Mark Burnett in connection with his participation in The Martha Stewart Show and a one-time litigation reserve of $17.1 million in connection with the In re Martha Stewart Living Omnimedia Securities Litigation matter, which included incurred and anticipated professional fees, net of insurance reimbursement.
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. Our Company is organized into three business segments with Publishing and Broadcasting representing our media platforms that are complemented by our Merchandising segment. Summarized below are our operating results for 2010, 2009 and 2008.
We generate revenue from various sources such as advertising customers and licensing partners. Publishing is our largest business segment, accounting for 63% of our total revenues in 2010. The primary source of Publishing segment revenue is advertising from our magazines, which include Martha Stewart Living, Martha Stewart Weddings; Everyday Food; and Whole Living. Magazine subscription, advertising revenue generated from our digital properties and newsstand sales, along with royalties from our book business, account for most of the balance of Publishing segment revenue. Broadcasting segment revenue is derived primarily from our
television advertising and licensing, as well as satellite radio advertising and licensing. Television programming is comprised of The Martha Stewart Show, a daily home and lifestyle show, Everyday Food, which airs on PBS, Mad Hungry with Lucinda Scala Quinn, programs featuring Chef Emeril Lagasse, as well as other programs. Satellite radio programming encompasses the Martha Stewart Living Radio channel on Sirius XM Radio. Merchandising segment revenues are generated from the licensing of our trademarks and designs for a variety of products sold at multiple price points through a wide range of distribution channels.
We incur expenses largely due to compensation and related charges across all segments. In addition, we incur expenses related to the physical costs associated with producing magazines (including related direct mail and other marketing expenses), the technology costs associated with our digital properties and the costs associated with producing our television programming. We also incur general overhead costs including facilities and related expenses.
Detailed segment operating results for 2010, 2009 and 2008 are summarized below.
2010 Operating Results Compared to 2009 Operating Results
In 2010, total revenues decreased approximately 6% from 2009 due predominantly to the conclusion of our Kmart agreement, which ended in January 2010, as well as the absence of TurboChef revenue in 2010. Partially offsetting the decline in revenues was an increase in revenues in 2010 from 2009 from Merchandising segment partners other than Kmart and higher television licensing.
Revenues from our media platforms declined in 2010 from the prior year due to decreased revenues from circulation for our magazines primarily because of lower subscription revenue for Martha Stewart Living and Everyday Food, as well as the discontinuation of the subscription-based Dr. Andrew Weils Self Healing newsletter and the newsstand-based Weil special interest publications. Media platform revenues also declined in 2010 from the prior year due to the absence of TurboChef revenue in 2010 and lower licensing fees related to our new radio agreement with Sirius XM Radio. Print advertising and Broadcasting advertising declined in 2010 from 2009. These declines were partially offset by an increase in 2010 in digital advertising revenue on our websites from the prior year, as well as the 2010 exclusive license of a significant portion of our library of television programming to the Hallmark Channel along with the delivery of new television programming to the Hallmark Channel.
Merchandising segment revenues declined in 2010 from 2009 primarily due to the conclusion of our Kmart agreement in January 2010, as well as the absence of TurboChef revenue in 2010. Excluding revenue from Kmart in both years, Merchandising segment revenues increased 48% for the year ended December 31, 2010 as compared to the prior year. The increase in revenues excluding Kmart was primarily due to the contributions of our new merchandising relationships, higher royalty rates and sales volume from certain of our existing partners, and a one-time $1.0 million payment received from a manufacturing partner.
In 2010, our operating costs and expenses before Corporate expenses decreased approximately 4% from the prior year. The 2009 operating costs and expenses were impacted by non-cash impairment charges in the Merchandising segment of $11.4 million related to our cost-based equity investment in United Craft MS Brands, LLC. Separately, 2009 results were favorably impacted by a $3.0 million cash make-whole payment in the Merchandising segment. Excluding these two items, our segment operating costs and expenses in 2010 were approximately flat with 2009, as increases in Broadcasting production costs related to the delivery of new programming were offset by declines in Publishing general and administrative, which benefited from lower headcount and facilities-related costs, as well as depreciation and amortization expenses, which decreased primarily due to full depreciation by the second quarter of 2010 of the costs associated with the 2007 launch of our redesigned website.
Corporate general and administrative expenses decreased in 2010 compared to 2009 due to lower rent expense as a result of the consolidation of certain offices and lower cash and non-cash bonuses and lower compensation-related expenses.
2009 Operating Results Compared to 2008 Operating Results
In 2009, total revenues decreased approximately 14% from 2008 due primarily to declines in print and television advertising revenue, as well as declines in our magazine subscription and newsstand revenues.
Revenues from our media platforms declined from the prior year mostly due to decreased revenues in our Publishing segment. The Publishing segment revenue decrease was the result of lower advertising revenue largely due to lower pages, lower subscription revenue, lower newsstand sales and the timing of books revenue, which was partially offset by higher digital advertising revenue. Our page views on our website increased, on average, in 2009 approximately 50% from 2008. In our Broadcasting segment, 2009 revenues declined from 2008 as the result of lower advertising revenue from lower ratings and certain one-time payments in 2008 related to Emeril Lagasses television programming, partially offset by higher integration revenue. The Broadcasting segment also benefited in 2009 from revenue related to our TurboChef relationship, a marketing and promotional agreement we entered into in 2008 and terminated in December 2009.
Merchandising segment revenues in 2009 declined from 2008 mostly due to a decrease in services that we provide to our partners for reimbursable zero-margin creative services projects, as well as the prior-year contribution from Sears Canada, a relationship that expired in 2008. Our agreement with Kmart ended in January 2010. In 2009, we recognized the pro rata portion of the $14.0 million minimum guaranteed royalty amount payable for the February 1, 2009 to January 31, 2010 period. In the fourth quarter of 2009, we also recognized $10.0 million in previously deferred royalties related to Kmart recoupment as non-cash revenue.
In 2009, our operating costs and expenses decreased approximately 14% from 2008 primarily due to lower production, distribution and editorial costs, selling and promotion expenses, and general and administrative expenses across our media segments. These cost savings included savings from lower page volume, lower paper costs, lower television production costs, and from reduced discretionary spending, as well as lower compensation costs from staff reductions. Also, the Publishing segment included a non-cash impairment charge in the fourth quarter of 2008 related primarily to the goodwill associated with our 2004 acquisition of the Body + Soul publication group with no comparable expense in 2009. Merchandising segment operating costs and expenses were slightly higher due to non-cash impairment charges of $11.4 million related to our cost-based equity investment in United Craft MS Brands, LLC. This was largely offset by lower selling and promotion expenses, as well as a 2009 benefit to Merchandising segment general and administrative expenses from a $3.0 million cash make-whole payment that we received in October 2009 from our crafts manufacturing partner in connection with our investment as a result of its capital restructuring. Cost savings throughout the segments were partially due to the continued reduction of headcount which was lower by approximately 8% as compared to the beginning of the year.
Corporate general and administrative expenses were lower in 2009 due to a combination of Company-wide expense reduction initiatives and certain 2008 one-time items. The 2008 expenses included a Company-wide reorganization that resulted in severance and other one-time compensation-related expenses.
During 2010, our overall cash, cash equivalents and short-term investments decreased $5.2 million from December 31, 2009 due primarily to principal pre-payments of the term loan. Cash, cash equivalents and short-term investments were $33.3 million and $38.5 million at December 31, 2010 and December 31, 2009, respectively.
RESULTS OF OPERATIONS
Comparison for the Year Ended December 31, 2010 to the Year Ended December 31, 2009.
Publishing segment revenues were essentially flat for the year ended December 31, 2010 from the prior year. Print advertising revenue decreased $1.0 million in 2010 from 2009 due to the decrease in advertising rates across all publications, which was largely offset by an increase in pages at Martha Stewart Living, Martha Stewart Weddings and Whole Living. Digital advertising revenue increased $4.4 million or 26% in 2010 from 2009 due to an increase in sold advertising volume. Overall digital advertising rates were lower in 2010 compared to 2009. Circulation revenue decreased $4.1 million in 2010 from the prior year due to the discontinuation of the subscription-based Dr. Andrew Weils Self Healing newsletter and lower effective subscription rates per copy and lower volume at Martha Stewart Living and Everyday Food. Circulation revenue was also impacted by the discontinuation of the newsstand-based Weil special interest publications and lower unit sales of Martha Stewart Weddings, special interest publications and Everyday Food. Partially offsetting the decline in circulation revenue were lower agent commissions for subscriptions of Everyday Food and Whole Living.
Production, distribution and editorial expenses increased $0.1 million for the year ended December 31, 2010 from the prior year due to higher art and editorial compensation and story costs to support the print and digital magazines, books and the websites, as well as higher production and distribution expenses related to the increase in magazine pages. These expenses were partially offset by lower paper costs, lower cash and non-cash bonuses and the discontinuation of Dr. Andrew Weils Self Healing newsletter and the Weil special interest publications.
Selling and promotion expenses decreased $0.5 million due to lower advertising and consumer marketing staff costs including lower cash and non-cash bonuses, as well as lower subscriber acquisition costs, lower newsstand placement expenses and the discontinuation of the Weil newsletter and special interest publications. The decrease in selling and promotion expenses was partially offset by higher direct mail investment for Martha Stewart Living and additional website infrastructure investment related to the replatforming of the website. General and administrative expenses decreased $1.9 million primarily due to lower headcount and lower facilities-related costs. Depreciation and amortization expenses decreased $1.1 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.
Broadcasting segment revenues decreased 8% for the year ended December 31, 2010 from the prior year. Advertising revenue decreased $1.0 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 Radio, 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 $3.5 million. Licensing and other revenue increased $0.8 million in 2010 due to the recognition of substantially all of the exclusive license fee of approximately $5.0 million from Hallmark Channel for a significant portion of our library of programming. In addition, licensing revenue increased from the delivery of new television programming to the Hallmark Channel as part of the companion programming to The Martha Stewart Show, which include Mad Hungry with Lucinda Scala Quinn, Whatever Martha! and specials. These increases were largely offset by the absence of revenue from our TurboChef relationship and historical cable retransmission revenue, both of which contributed revenues in 2009, as well as lower licensing revenues related to Emeril Lagasses television programming and lower international licensing revenues.
Production, distribution and editorial expenses increased $4.2 million due primarily to television production costs related to the new programming on the Hallmark Channel. These expenses were partially offset by lower distribution fees and production cost savings related to season 5 of The Martha Stewart Show as compared to the prior years season 4. Selling and promotion expenses increased $0.2 million due to higher compensation-related costs. Depreciation and amortization expenses decreased $0.5 million primarily due to the timing of amortization in connection with the revenue recognition related to our library of Emeril Lagasse television content.
Merchandising segment revenues decreased 19% for the year ended December 31, 2010 from the prior year. The 2009 revenues included $24.5 million of revenues related to our agreement with Kmart as compared to only $1.2 million in 2010. Excluding revenues from Kmart, other Merchandising segment revenues increased $13.6 million or 48% primarily due to the contributions of our new merchandising relationships, higher royalty rates and sales volume from certain of our existing partners, a one-time $1.0 million payment received from a manufacturing partner and the additional one-time revenue from the early termination of our agreement with 1-800-Flowers.com. These increases in royalty and other revenue were partially offset by the absence of revenue from our TurboChef relationship, which contributed revenues in 2009.
Our agreement with Kmart ended in January 2010. The pro-rata portion of revenues related to the contractual minimum amounts from Kmart covering the specified periods is listed separately above as Kmart minimum guarantee true-up. In 2009, we also recognized royalties that were previously received and deferred and were subject to recoupment. No royalties were recouped throughout the Kmart relationship and therefore, we recognized $10.0 million as non-cash revenue in the fourth quarter of 2009.
Production, distribution and editorial expenses decreased $1.7 million in 2010 due to lower allocated facilities costs, as compared to 2009, as well as lower cash and non-cash bonuses. 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 $1.2 million mostly as a result of services that we provide to our partners for reimbursable, zero-margin creative services projects. General and administrative costs increased $2.8 million largely due to the benefit of a $3.0 million cash make-whole payment that we recognized in 2009 from our crafts manufacturing partner in connection with our investment as the result of its capital restructuring. In addition, general and administrative costs increased in 2010 due to higher allocated facilities costs due to the change in policy described above, partially offset by lower cash and non-cash bonus accruals. In 2009, we recorded non-cash impairment charges of $11.4 million related to our cost-based equity investment in United Craft MS Brands, LLC.
Corporate operating costs and expenses decreased 20% for the year ended December 31, 2010 from the prior year. General and administrative expenses decreased $7.2 million due to lower rent expense as a result of the consolidation of certain offices and lower cash and non-cash bonuses and lower compensation-related expenses. Depreciation and amortization expenses decreased $1.6 million due to lower depreciation expense also related to the relocation of our office space.
INTEREST (EXPENSE) / INCOME, NET. Interest expense, net, was $0.1 million for both 2010 and 2009.
LOSS ON SALE OF FIXED ASSET. Loss on the sale of a fixed asset was $0.6 million for 2010 with no comparable loss in the prior year.
GAIN ON SALE OF SHORT-TERM INVESTMENTS. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $1.5 million for 2010 and $0.3 million in 2009.
LOSS ON EQUITY SECURITIES. Loss on equity securities was $0.02 million for 2010 compared to $0.9 million in 2009. The losses were the result of marking certain assets to fair value in accordance with accounting principles governing derivative instruments.
OTHER (LOSS)/INCOME. Other loss was $0.2 million for 2009 with no comparable loss in 2010. 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 was $1.7 million for both 2010 and 2009.
NET LOSS. Net loss was ($9.6) million for 2010, compared to a net loss of ($14.6) million for 2009, as a result of the factors described above.
RESULTS OF OPERATIONS
Comparison for the Year Ended December 31, 2009 to the Year Ended December 31, 2008.
Publishing segment revenues decreased 18% for the year ended December 31, 2009 from the prior year. Print advertising revenue decreased $20.1 million due to the decrease in pages in Martha Stewart Living, Martha Stewart Weddings, Everyday Food and Body + Soul. The decrease in advertising pages was accompanied by a decrease in advertising rates at Martha Stewart Living and Martha Stewart Weddings partially offset by slightly higher advertising rates in Everyday Food and Body + Soul driven in part by a higher circulation rate base. Digital advertising revenue increased $2.6 million, or 18%, due to an increase in audience and sold advertising volume, despite lower effective rates. Circulation revenue decreased $12.1 million due to higher agency commissions and lower effective subscription rate per copy for Martha Stewart Living, Everyday Food and Body + Soul, offset in part by a higher subscriber volume. Circulation revenue also decreased as a result of lower newsstand unit volume across all of our titles, as well as the prior year contribution of eight special interest publications as compared to five special interest publications in 2009. Revenue related to our books business decreased $1.9 million primarily due to the timing of delivery and acceptance of manuscripts related to our multi-book agreements with Clarkson Potter/Publishers for Martha Stewart books and Harper Studios for Emeril Lagasse books. Other revenue decreased $1.6 million as digital product revenue decreased $1.1 million due to the inclusion of revenue from Martha Stewart Flowers in the first quarter of 2008. Beginning in the second quarter of 2008, we transitioned to a co-branded agreement with 1-800-Flowers.com. Revenue and related earnings for this business were reported in our Merchandising segment.
Production, distribution and editorial expenses decreased $12.7 million, primarily due to savings related to lower volume of pages and lower paper costs. Additionally, art and editorial story and staff costs decreased partly due to lower headcount. Production, distribution and editorial costs also decreased due to the prior year transition of our flowers business to 1-800-Flowers.com, which eliminated inventory and shipping expenses. Beginning in the second quarter of 2008, costs related to our higher-margin 1-800-Flowers.com program were reported in the Merchandising segment. Selling and promotion expenses decreased $8.2 million due to lower fulfillment rates associated with Martha Stewart Living and Everyday Food, lower marketing program and lower circulation marketing costs. These decreases were partially offset by higher newsstand placement expenses for Martha Stewart Living and Everyday Food and certain higher compensation expenses. General and administrative expenses decreased $1.0 million due to reduced headcount as compared to the prior year as well as lower allocated payroll and benefits and lower non-cash compensation costs, partially offset by higher facilities-related expenses from the reallocation of rent charges to reflect current utilization of office space. The increase in our Publishing segment rent allocation has offsetting decreases in our Merchandising and Corporate segments. In the fourth quarter of 2008, we recorded a non-cash impairment charge related primarily to the goodwill associated with our 2004 acquisition of the Body + Soul publication group. This charge was the result of our annual impairment testing in connection with the preparation of the 2008 Annual Report on Form 10-K.
Broadcasting segment revenues decreased 3% for the year ended December 31, 2009 from the prior year. Advertising revenue decreased $2.2 million primarily due to the decline in household ratings for The Martha Stewart Show and lower Everyday Food PBS sponsorship revenue of $0.5 million as the result of the decision not to produce an additional season of Everyday Baking from Everyday Food in 2009. This decrease was partially offset by an increase in the quantity of integrations at higher rates, as well as higher advertising rates overall. Radio revenue decreased $0.5 million related to our new agreement with Sirius XM Radio which has the potential to provide for greater advertising opportunity to replace lower licensing fees. Licensing and other revenue increased $1.5 million due to the revenue related to the conclusion of our TurboChef relationship and historical cable retransmission partially offset by lower revenue from Emeril Lagasses television programming and lower international distribution of The Martha Stewart Show.
Production, distribution and editorial expenses decreased $1.6 million due to production cost savings related to season 4 of The Martha Stewart Show which ended in September 2009 as compared to the prior years season 3, as well as lower distribution fees. Selling and promotion expenses decreased $0.4 million primarily due to lower headcount and reduced spending related to the season 5 launch as compared to the prior years season 4
launch. General and administrative expenses decreased $1.4 million due to lower headcount and related costs. Depreciation and amortization expenses decreased $1.2 million primarily due to the timing of amortization in connection with the revenue recognition related to our library of Emeril Lagasse television content.
Merchandising segment revenues decreased 9% for the year ended December 31, 2009 from the prior year. Our agreement with Kmart ended in January 2010. The pro-rata portion of revenues related to the contractual minimum amounts from Kmart covering the specified periods is listed separately above as Kmart minimum guarantee true-up. In 2009, we also recognized royalties that were previously received and deferred and were subject to recoupment. No royalties were recouped throughout the Kmart relationship and therefore, we recognized $10.0 million as non-cash revenue in the fourth quarter of 2009. The decrease in other revenues was mostly due to a decrease in services that we provide to our partners for reimbursable zero-margin creative services projects and the prior year revenue true-up from Sears Canada, a relationship that expired in the third quarter of 2008.
Production, distribution and editorial expenses decreased $0.9 million due primarily to lower compensation costs as compared to the prior year due to reduced staffing. Selling and promotion expenses decreased $3.6 million primarily as a result of the corresponding revenue decrease in services that we provide to our partners for reimbursable creative services projects. General and administrative costs decreased $5.0 million primarily due to a $3.0 million cash make-whole payment that we received in October 2009 from our crafts manufacturing partner in connection with our investment as the result of its capital restructuring. In addition, general and administrative expenses decreased due to lower facilities-related expenses primarily due to reallocating rent charges among the segments to reflect current utilization. The decrease in our Merchandising segment rent allocation has offsetting increases in our Publishing segment. For the year ended December 31, 2009, we recorded non-cash impairment charges of $11.4 million related to our cost-based equity investment in United Craft MS Brands, LLC.
Corporate operating costs and expenses decreased 9% for the year ended December 31, 2009 from the prior year. General and administrative expenses decreased largely due to a company-wide reorganization in 2008 that resulted in severance and other one-time expenses as well as charges related to facility expenses in 2008. Expenses also decreased due to reallocating rent charges to reflect current utilization. The decrease in our Corporate segment has an offsetting increase in our Publishing segment. Partially offsetting the decrease in general and administrative expenses was higher bonus expense in 2009 compared to 2008. Depreciation and amortization expenses increased $1.0 million due to accelerated depreciation charges related to the relocation of our office space.
INTEREST (EXPENSE) / INCOME, NET. Interest expense, net, was $0.1 million for 2009, compared to interest income, net, of $0.5 million for 2008. The decrease in interest income was primarily attributable to lower interest rates on our money market funds and short-term investments, as well as lower average cash balances. The decrease was partially offset by a decline in interest expense in connection with our term loan related to the acquisition of certain assets of Emeril Lagasse due to a lower average outstanding principal balance in 2009 and lower interest rates.
GAIN ON SALE OF SHORT-TERM INVESTMENTS. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $0.3 million in 2009 with no comparable gain in 2008.
LOSS ON EQUITY SECURITIES. Loss on equity securities was $0.9 million for 2009 compared to a loss of $2.2 million in 2008. The loss was the result of marking certain assets to fair value in accordance with accounting principles governing derivative instruments. The losses were partially offset by our gain from the sale of certain equity securities.
OTHER (LOSS)/INCOME. Other loss was $0.2 million for 2009 compared to $0.8 million in 2008. Certain investments in equity securities, previously accounted for under the equity method, were accounted for under the cost method beginning in the second quarter of 2009.
INCOME TAX EXPENSE. Income tax expense was $1.7 million for 2009, compared to a $2.3 million expense in 2008. The difference is primarily due to the establishment of deferred tax liabilities in 2008 on indefinite lived intangibles with no tax basis.
NET LOSS. Net loss was ($14.6) million for 2009, compared to a net loss of ($15.7) million for 2008, as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has generally been from cash generated by operating activities. Specifically, in 2008, cash from operations was provided by Kmart and from the Emeril Lagasse assets acquired in 2008. In 2009, we used cash for operations due to the significant reduction in cash received related to the Kmart
contractual minimums as compared to 2008, as well as the increase in working capital. The increase to working capital was due to the increase in certain receivables and the decrease in deferred subscription revenue. In 2010, cash from operations was provided by our business segment performance as described above. Operating results and cash flows may change due to a variety of factors, including changes in demand for the product, changes in our cost structure and changes in macroeconomic factors. Any such changes in our business can have a significant effect on cash flows.
We believe, as described further below, that our available cash balances and short-term investments will be sufficient to meet our recurring cash needs for working capital and capital expenditures for 2011.
Sources and Uses of Cash
During 2010, our overall cash, cash equivalents and short-term investments decreased $5.2 million from December 31, 2009 due primarily to principal pre-payments of the term loan. Cash, cash equivalents and short-term investments were $33.3 million and $38.5 million at December 31, 2010 and December 31, 2009, respectively.
Our cash inflows from operating activities are generated by our business segments from revenues, as described above, 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 and (used in) operating activities was $1.9 million, $(9.3) million and $39.7 million for the years ended December 31, 2010, 2009 and 2008, respectively. In 2010, cash provided by operations increased from 2009 despite our 2010 net loss as the result of non-cash factors impacting our net loss. In addition, cash provided by operations in 2010 benefited from the satisfaction of the 2009 year-end receivable due from Kmart and other advertising receivables, partially offset by the addition of a receivable related to the recognition of substantially all of the exclusive license fee from Hallmark Channel for a significant portion of our library of programming.
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 provided by and (used in) investing activities was $0.2 million, $(9.6) million and $(38.9) million for the years ended December 31, 2010, 2009 and 2008, respectively. In 2010, cash flow provided by investing activities was the result of cash received from the sale of a fixed asset and net sales of short-term investments largely offset by cash used for capital improvements, including expenditures to upgrade office technology and to relocate and consolidate certain offices.
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, as well as proceeds from debt financing. Cash outflows from financing activities generally include principal repayment of outstanding debt and debt issuance costs.
Cash flows (used in) and provided by financing activities were $(4.2) million, $(5.9) million and $18.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. In 2010, we made $4.5 million in principal pre-payments on our term loan with Bank of America related to the acquisition of certain assets of Emeril Lagasse.
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 related to the line of credit as of December 31, 2010. We had no outstanding borrowings under this facility as of December 31, 2010 and had letters of credit outstanding of $2.6 million.
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 is secured by substantially all of the assets of the Emeril business that we acquired. The loan agreement requires equal principal payments of $1.5 million and accrued interest to be paid by us quarterly for the duration of the loan term, approximately 5 years. As of December 31, 2010, we have paid $21.0 million in principal, including prepayment of the $4.5 million due through September 30, 2011, such that $9.0 million was outstanding at December 31, 2010. Only one principal payment of $1.5 million due as of December 31, 2011 is reflected as a current liability in the consolidated balance sheet as of December 31, 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 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.
A summary of the most significant financial covenants is as follows:
In the fourth quarter, we had anticipated that we would not be in compliance with the covenants of the loan agreement that require us to maintain a Funded Debt to EBITDA Ratio equal to or less than 2.0 and a Parent Guarantor Basic Fixed Charge Ratio equal to or greater than 2.75 for the twelve month period ending December 31, 2010. As a result, we 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. Other than the covenants that were waived, we were compliant with the debt covenants as of December 31, 2010.
In the first quarter of 2011, we anticipated that we would not be in compliance with the covenants of the loan agreement that require us to maintain Tangible Net Worth of at least $40 million as of March 31, 2011, as well as to maintain a Funded Debt to EBITDA Ratio equal to or less than 2.0 and a Parent Guarantor Basic Fixed Charge Ratio equal to or greater than 2.75 for the twelve month period ending June 30, 2011. As a result, we executed an amendment to the loan agreement with Bank of America, which requires us to maintain Tangible Net Worth of at least $35 million that applies to the first quarter of 2011, and with respect to the other two covenants, we executed a waiver that excludes these adjusted EBITDA-related covenants in their entirety for the second quarter of 2011.
We currently expect to be compliant with all other debt covenants through 2011. Additionally, we currently have cash balances that are in excess of the loan payable, which provides us with the ability to repay the outstanding principal in full at any time in the event of default or to prevent default.
The loan agreement also contains a variety of other customary affirmative and negative covenants that, among other things, limit us and our subsidiaries ability to incur additional debt, suffer the creation of liens on their assets, pay dividends or repurchase stock, make investments or loans, sell assets, enter into transactions with affiliates other than on arms length terms in the ordinary course of business, make capital expenditures, merge into or acquire other entities or liquidate. The negative covenants expressly permit us to, among other things: incur an additional $15 million of debt to finance permitted investments or acquisitions; incur an additional $15 million of earnout liabilities in connection with permitted acquisitions; spend up to $30 million repurchasing our stock or paying dividends thereon (so long as no default or event of default existed at the time of or would result from such repurchase or dividend payment and we would be in pro forma compliance with the above-described financial covenants assuming such repurchase or dividend payment had occurred at the beginning of the most recently-ended four-quarter period); make investments and acquisitions (so long as no default or event of default existed at the time of or would result from such investment or acquisition and we would be in pro forma compliance with the above-described financial covenants assuming the acquisition or investment had occurred at the beginning of the most recently-ended four-quarter period); make up to $15 million in capital expenditures in fiscal year 2008 and $7.5 million in each subsequent fiscal year, provided that we can carry over any unspent amount to any subsequent fiscal year (but in no event may we make more than $15 million in capital expenditures in any fiscal year); sell one of our investments (or any asset we might receive in conversion or exchange for such investment); and sell assets during the term of the loan comprising, in the aggregate, up to 10% of our consolidated shareholders equity, provided we receive at least 75% of the consideration in cash.
Our commitments consist primarily of leases for office facilities under operating lease agreements and principal repayments of our loan. Future minimum payments under our operating leases are included in Note 13, Commitments and Contingencies, in the Notes to Consolidated Financial Statements and are summarized in the table below:
In addition to our contractual obligations, in 2011, we expect to use approximately $3.0 million in cash for 2011 capital expenditures due to continued upgrades to our corporate information technology, as well as the continued leasehold improvements to our office space.
OFF-BALANCE SHEET ARRANGEMENTS
Our bylaws may require us to indemnify our directors and officers against liabilities that may arise by reason of their status as such and to advance their expenses incurred as a result of any legal proceedings against them as to which they could be indemnified.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, deferred production costs, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies disclosed in this Annual Report on Form 10-K, the following may involve the highest degree of judgment and complexity.
We recognize revenues when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances.
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, 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 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 of selling price for certain of our radio deliverables; however, in most instances we have allocated consideration based upon its best estimate of selling price. We established VSOE of selling price for certain radio deliverables by demonstrating that a substantial majority of the recent standalone sales of those deliverables are priced within a relatively narrow range. However, our other deliverables generally are priced with a wide range of discounts/premiums as the result of a variety of factors, including the size of the advertiser and the volume and placement of advertising sold to the advertiser. 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 (i.e., when magazines are on sale, at the time television integrations are aired or when the digital impressions are served).
Print advertising revenues are generally recorded upon the on-sale dates of the magazines and are stated net of agency commissions and cash and sales discounts. Subscription revenues are recognized on a straight-line basis over the life of the subscription as issues are delivered. Newsstand revenues are recognized based on estimates with respect to future returns and net of brokerage and newsstand-related fees. We base our estimates on our historical experience and current market conditions. Revenues earned from book publishing are recorded as manuscripts are delivered to and/or accepted by our publisher. Additional revenue is recorded as sales on a unit basis exceed the advanced royalty for the individual title or in certain cases, advances on cross-collateralized titles. Digital advertising revenues are generally based on the sale of impression-based advertisements, which are recorded in the period in which the advertisements are served.
Television advertising revenues for season 5 of The Martha Stewart Show in syndication were recognized when the related commercials were aired and were recorded net of agency commission and estimated reserves for television audience underdelivery. Television spot advertising for season 6 of The Martha Stewart Show is sold by Hallmark Channel, with net receipts payable to us quarterly. Since advertisers contract with Hallmark Channel directly, balance sheet reserves for television audience underdelivery are not required; however, revenues continue to be recognized when commercials are aired and are recorded net of agency commission and the impact of television audience underdelivery. Television integration revenues are recognized when the segment featuring the related product/brand immersion is initially aired. Television revenues related to Emeril Lagasse are generally recognized when services are performed, regardless of when the episodes air. Licensing revenues are recorded as earned in accordance with the specific terms of each agreement and are generally recognized upon delivery of the episodes to the licensee, provided that the license period has begun. Throughout 2010, we executed several agreements with Hallmark Channel, certain of which are combined as one arrangement. The agreements with Hallmark Channel are accounted for under the guidance set forth in ASC 926, Entertainment Films. Radio advertising revenues are generally recorded when the related commercials are aired and are recorded net of agency commissions. Licensing revenues from our radio programming are recorded on a straight-line basis over the term of the agreement.
Licensing-based revenues, most of which are in our Merchandising segment, are accrued on a monthly basis based on the specific mechanisms of each contract. Payments are generally made by our partners on a quarterly basis. Generally, revenues are accrued based on actual sales, while any minimum guarantees are earned evenly over the fiscal year. Revenues related to our agreement with Kmart had been recorded on a monthly basis based on actual
retail sales, until the last period of the year, when we recognized a substantial majority of the true-up between the minimum royalty amount and royalties paid on actual sales. Not recognizing revenue until the fourth quarter was originally driven in large part by concern about whether the collectability of the minimums was reasonably assured in the wake of the Kmart Chapter 11 filing. Concern about the collectability persisted in subsequent years due to difficulties in the relationship with Kmart and numerous store closings that caused royalties to fall short of the minimums. Accordingly, the true-up payment was recorded in the fourth quarter at the time the true-up amounts were known and subsequently collected. Our Kmart agreement ended in January 2010.
We maintain reserves for all segment receivables, as appropriate. These reserves are adjusted regularly based upon actual results. Allowances for uncollectible receivables are estimated based upon a combination of write-off history, aging analysis and any specific, known troubled accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.
Television Production Costs
Television production costs are capitalized and amortized based upon estimates of future revenues to be received and future costs to be incurred for the applicable television product. We base our estimates primarily on existing contracts for programs, historical advertising rates and ratings, as well as market conditions. Estimated future revenues and costs are adjusted regularly based upon actual results and changes in market and other conditions.
Goodwill and Indefinite-Lived Intangible Assets
We are required to analyze our goodwill and other intangible assets on an annual basis, as well as when events and circumstances indicate impairment may have occurred. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates could negatively affect the fair value of our assets and result in an impairment charge. In estimating fair value, we must make assumptions and projections regarding items such as future cash flows, future revenues, future earnings and other factors. The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. If these estimates or their related assumptions change in the future, we may be required to record an impairment loss for any of our intangible assets. Had the estimated fair values of each of these reporting units been hypothetically lower by 10% as of our annual testing date, the fair values of the reporting units would have exceeded their respective carrying values. Had the estimated fair values of each of these reporting units been hypothetically lower by 20% as of our annual testing date, the fair value of one of our reporting units would not have exceeded its respective carrying value, which could result in an impairment charge of less than $1.0 million. The recording of any resulting impairment loss could have a material adverse effect on our financial statements.
Long-Lived and Finite-Lived Intangible Assets
We review the carrying values of our long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge, which could have a material adverse effect on our financial statements. We have a finite-lived intangible asset related to the purchase of the library of Emeril Lagasse television content. The unamortized portion of this finite-lived intangible asset was $1.3 million as of December 31, 2010. If we were unable to further derive revenues from this television content library, then the finite-lived intangible asset would be subject to accelerated amortization of up to $1.3 million.
Deferred Income Tax Asset Valuation Allowance
We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. In evaluating our ability to recover our deferred income tax assets, we consider all
available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. Our cumulative pre-tax loss in recent years represents sufficient negative evidence for us to determine that the establishment of a full valuation allowance against the deferred tax asset is appropriate. This valuation allowance offsets net deferred tax assets associated with future tax deductions, as well as carryforward items. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. See Note 10, Income Taxes, in the Notes to Consolidated Financial Statements for additional information.
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 are restricted shares of common stock, restricted stock unit awards and stock options. Restricted shares are valued at the market value of traded shares on the date of grant. Other than performance-based shares tied to the market price of our Class A common stock, performance-based 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.
We are exposed to certain market risks as the result of our use of financial instruments, in particular the potential market value loss arising from adverse changes in interest rates as well as from adverse changes in our publicly traded investment. We do not utilize financial instruments for trading purposes.
We are exposed to market rate risk due to changes in interest rates on our loan agreement with Bank of America that we entered into on April 2, 2008 under which we borrowed $30.0 million to fund a portion of the acquisition of certain assets of Emeril Lagasse. Interest rates applicable to amounts outstanding under this facility are at variable rates based on the 1-month LIBOR rate plus 2.85%. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows but does not impact the fair value of the instrument. We had outstanding borrowings of $9.0 million on the term loan at December 31, 2010 at an average rate of 3.12% for the year. A one percentage point increase in the interest rate would have increased interest expense by $0.1 million for 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. We attempt to protect and preserve our invested funds by limiting default, market and reinvestment risk. To achieve this objective, we invest our excess cash in debt instruments of the United States Government and its agencies and in high-quality corporate issuers (including bank instruments and money market funds) and, by internal policy, limit both the term and amount of credit exposure to any one issuer. As of December 31, 2010, net unrealized gains and losses on these investments were not material. However, in 2010, we recorded approximately $0.6 million in interest income. 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.
The information required by this Item is set forth on pages F-1 through F-32 of this Annual Report on Form 10-K and is incorporated by reference herein.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal 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 Exchange Act required by Exchange Act Rules 13a-15(b) or 15d-15(e)), as of the end of the period covered by this report. Based upon that evaluation, our Principal Executive Officer and Principal 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 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 Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our Principal Executive Officer and Principal Financial Officer concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.
Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on our internal control over financial reporting. The attestation report is included herein.
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 Principal Financial Officer, we have determined that, during the fourth 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.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.
We have audited Martha Stewart Living Omnimedia, Inc.s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Martha Stewart Living Omnimedia, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 14, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young
New York, New York
March 14, 2011
Although we did not achieve the adjusted EBITDA (i.e., consolidated income (loss) before interest income or expense, taxes, depreciation and amortization, impairment, non-cash compensation expense and other expense) target provided under the Martha Stewart Living Omnimedia, Inc. Annual Incentive Plan for 2010, the Compensation Committee considered the recommendation of management to acknowledge employee efforts in an environment that continued to be challenging by making discretionary recognition awards. These payments included recognition awards to certain of the named executive officers, as an acknowledgement of their leadership and contributions during 2010 and for further retention and motivational purposes, as follows: Robin Marino, $50,000; Kelli Turner, $40,000; and Peter Hurwitz, $35,000.
The information required by this Item is set forth in our Proxy Statement for our 2011 annual meeting of stockholders (our Proxy Statement) under the captions PROPOSAL 1 ELECTION OF DIRECTORS Information Concerning Nominees, INFORMATION CONCERNING EXECUTIVE OFFICERS, MEETINGS AND COMMITTEES OF THE BOARD Code of Ethics and Audit Committee, and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE and is hereby incorporated herein by reference.
The information required by this Item is set forth in our Proxy Statement under the captions MEETINGS AND COMMITTEES OF THE BOARD Compensation Committee Interlocks and Insider Participation, COMPENSATION OF OUTSIDE DIRECTORS, DIRECTOR COMPENSATION TABLE, COMPENSATION COMMITTEE REPORT, COMPENSATION DISCUSSION AND ANALYSIS, SUMMARY COMPENSATION TABLE, GRANTS OF PLAN-BASED AWARDS IN 2010, EXECUTIVE COMPENSATION AGREEMENTS, OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2010, OPTION EXERCISES AND STOCK VESTED DURING 2010, and POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL and is hereby incorporated herein by reference.
The information required by this Item regarding beneficial ownership of our equity securities is set forth in our Proxy Statement under the caption SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and is hereby incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth certain information regarding our equity compensation plans as of December 31, 2010.
EQUITY COMPENSATION PLAN INFORMATION
The information required by this Item is set forth in our Proxy Statement under the caption CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS and MEETING AND COMMITTEES OF THE BOARD Corporate Governance and is hereby incorporated herein by reference.
The information required by this Item is set forth in our Proxy Statement under the caption INDEPENDENT PUBLIC ACCOUNTANTS and is hereby incorporated herein by reference.
(a) (1) and (2) Financial Statements and Schedules: See page F-1 of this Annual Report on Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 14, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Each of the above signatures is affixed as of March 14, 2011.
FINANCIAL STATEMENT SCHEDULES AND OTHER
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.:
We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Martha Stewart Living Omnimedia, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Martha Stewart Living Omnimedia Inc.s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young
New York, New York
March 14, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010, 2009 and 2008
(in thousands except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
(in thousands except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2010, 2009 and 2008
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008