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Martha Stewart Living Omnimedia 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-10.2
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32
  7. Ex-32
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-15395

 

 

MARTHA STEWART LIVING OMNIMEDIA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-2187059

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

601 West 26th Street, New York, NY   10001
(Address of principal executive offices)   (Zip Code)

(Registrant’s telephone number, including area code) (212) 827-8000

(Former name, former address and former fiscal year,

if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨     No  x

 

Class

 

Outstanding as of November 1, 2010

 

Class A, $0.01 par value

    28,641,547   

Class B, $0.01 par value

    26,317,960   
       

Total

    54,959,507   
       

 

 

 


Table of Contents

 

Martha Stewart Living Omnimedia, Inc.

Index to Form 10-Q

 

              Page  
Part I.   Financial Information   
  Item 1.    Financial Statements.      3   
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.      14   
  Item 3.    Quantitative and Qualitative Disclosures About Market Risk.      28   
  Item 4.    Controls and Procedures.      29   
Part II.   Other Information   
  Item 1.    Legal Proceedings.      30   
  Item 1A.    Risk Factors.      30   
  Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.      30   
  Item 3.    Defaults Upon Senior Securities.      30   
  Item 4.    Reserved      30   
  Item 5.    Other Information.      30   
  Item 6.    Exhibits.      31   
  Signatures      32   


Table of Contents

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

MARTHA STEWART LIVING OMNIMEDIA, INC.

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

      September 30,
2010
    December 31,
2009
 
     (unaudited)        

ASSETS

  

CURRENT ASSETS

    

Cash and cash equivalents

   $ 27,238      $ 25,384   

Short-term investments

     14,167        13,085   

Receivable – sale of short-term investment

     1,001        —     

Accounts receivable, net

     39,705        56,364   

Inventory

     5,285        5,166   

Deferred television production costs

     6,162        3,788   

Other current assets

     5,066        5,709   
                

Total current assets

     98,624        109,496   

PROPERTY, PLANT AND EQUIPMENT, net

     14,767        17,268   

GOODWILL, net

     45,107        45,107   

OTHER INTANGIBLE ASSETS, net

     46,550        47,070   

OTHER NONCURRENT ASSETS, net

     11,847        10,850   
                

Total assets

   $ 216,895      $ 229,791   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable and accrued liabilities

   $ 26,728      $ 26,752   

Accrued payroll and related costs

     8,538        7,495   

Current portion of deferred subscription revenue

     15,935        18,587   

Current portion of other deferred revenue

     6,132        4,716   

Current portion of loan payable

     1,500        —     
                

Total current liabilities

     58,833        57,550   
                

DEFERRED SUBSCRIPTION REVENUE

     4,626        5,672   

OTHER DEFERRED REVENUE

     1,803        2,759   

LOAN PAYABLE

     9,000        13,500   

DEFERRED INCOME TAX LIABILITY

     4,208        3,200   

OTHER NONCURRENT LIABILITIES

     3,638        3,290   
                

Total liabilities

     82,108        85,971   
                

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY

    

Class A Common Stock, $.01 par value, 350,000 shares authorized; 28,433 and 28,313 shares outstanding in 2010 and 2009, respectively

     284        283   

Class B Common Stock, $.01 par value, 150,000 shares authorized; 26,568 and 26,690 shares outstanding in 2010 and 2009, respectively

     266        267   

Capital in excess of par value

     294,304        290,387   

Accumulated deficit

     (160,305     (146,605

Accumulated other comprehensive income

     1,013        263   
                
     135,562        144,595   

Less: Class A Treasury Stock – 59 shares at cost

     (775     (775
                

Total shareholders’ equity

     134,787        143,820   
                

Total liabilities and shareholders’ equity

   $ 216,895      $ 229,791   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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MARTHA STEWART LIVING OMNIMEDIA, INC.

Consolidated Statements of Operations

(unaudited, in thousands, except per share amounts)

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
      2010     2009     2010     2009  

REVENUES

        

Publishing

   $ 30,038      $ 27,053      $ 88,901      $ 88,938   

Broadcasting

     5,795        11,036        26,076        31,859   

Internet

     4,280        2,761        12,044        9,543   

Merchandising

     9,575        8,931        31,200        26,867   
                                

Total revenues

     49,688        49,781        158,221        157,207   
                                

OPERATING COSTS AND EXPENSES

        

Production, distribution and editorial

     29,184        29,732        85,837        87,212   

Selling and promotion

     14,803        13,232        42,889        41,569   

General and administrative

     11,982        16,402        37,887        43,100   

Depreciation and amortization

     1,627        2,096        3,689        5,994   

Impairment charge

     —          —          —          12,600   
                                

Total operating costs and expenses

     57,596        61,462        170,302        190,475   
                                

OPERATING LOSS

     (7,908     (11,681     (12,081     (33,268

OTHER (EXPENSE) / INCOME

        

Interest income / (expense), net

     46        (1     (62     (91

Loss on sale of fixed asset

     (647     —          (647     —     

Gain on sale of short-term investments

     403        —          403        330   

Loss on equity securities

     (5     —          (24     (877

Other loss

     —          —          —          (236
                                

Total other expense

     (203     (1     (330     (874
                                

LOSS BEFORE INCOME TAXES

     (8,111     (11,682     (12,411     (34,142

Income tax provision

     (475     (432     (1,289     (1,190
                                

NET LOSS

   $ (8,586   $ (12,114   $ (13,700   $ (35,332
                                

LOSS PER SHARE – BASIC AND DILUTED

        

Net Loss

   $ (0.16   $ (0.22   $ (.25   $ (0.66
                                

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

        

Basic and diluted

     54,487        53,865        54,416        53,817   

The accompanying notes are an integral part of these consolidated financial statements.

 

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MARTHA STEWART LIVING OMNIMEDIA, INC.

Consolidated Statement of Shareholders’ Equity

For the Nine Months Ended September 30, 2010

(unaudited, in thousands)

 

    Class A
Common Stock
    Class B
Common Stock
    Capital in  excess
of par value
    Accumulated
deficit
    Accumulated
other
comprehensive

income
    Class A
Treasury Stock
       
     Shares     Amount     Shares     Amount           Shares     Amount     Total  

Balance at January 1, 2010

    28,313      $ 283        26,690      $ 267      $ 290,387      $ (146,605   $ 263        (59   $ (775   $ 143,820   

Comprehensive loss:

                   

Net loss

    —          —          —          —          —          (13,700     —          —          —          (13,700

Other comprehensive income:

                   

Realized gain on sale of short-term investment

    —          —          —          —          —          —          (403     —          —          (403

Unrealized gain on short-term investment

    —          —          —          —          —          —          1,153        —          —          1,153   
                         

Total comprehensive loss

                      (12,950
                         

Conversion of shares

    122        1        (122     (1     —          —          —          —          —          —     

Issuance of shares of stock in conjunction with stock option exercises

    33        —          —          —          81        —          —          —          —          81   

Issuance of shares of stock and restricted stock, net of cancellations and tax withholdings

    (35     —          —          —          (306     —          —          —          —          (306

Non-cash equity compensation

    —          —          —          —          4,142        —          —          —          —          4,142   
                                                                               

Balance at September 30, 2010

    28,433      $ 284        26,568      $ 266      $ 294,304      $ (160,305   $ 1,013        (59   $ (775   $ 134,787   
                                                                               

The accompanying notes are an integral part of these consolidated financial statements.

 

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MARTHA STEWART LIVING OMNIMEDIA, INC.

Consolidated Statements of Cash Flows

(unaudited, in thousands)

 

      Nine Months Ended
September 30,
 
      2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (13,700   $ (35,332

Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:

    

Non-cash revenue

     (5,060     (370

Depreciation and amortization

     3,689        5,994   

Amortization of deferred television production costs

     15,439        14,359   

Impairment of cost-based investment

     —          12,600   

Non-cash equity compensation

     4,175        6,869   

Deferred income tax expense

     1,008        991   

Loss on equity securities

     24        877   

Gain on sale of short-term investment

     (403     (330

Loss on sale of fixed assets

     647        —     

Other non-cash charges, net

     493        590   

Changes in operating assets and liabilities

     651        (8,196
                

Net cash provided by / (used in) operating activities

     6,963        (1,948
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Investment in other noncurrent assets

     —          (828

Capital expenditures

     (4,156     (6,790

Proceeds from the sale of fixed assets

     1,403        —     

Purchases of short-term investments

     (14,282     (13,926

Sales of short-term investments

     14,845        14,649   
                

Net cash used in investing activities

     (2,190     (6,895
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Repayment of long-term debt

     (3,000     (4,500

Proceeds received from stock option exercises

     81        70   

Change in restricted cash

     —          (15,000
                

Net cash used in financing activities

     (2,919     (19,430
                

Net increase / (decrease) in cash

     1,854        (28,273

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     25,384        50,204   
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 27,238      $ 21,931   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements

(unaudited)

1. General

Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as “we,” “us,” “our,” or the “Company.”

The information included in the foregoing interim consolidated financial statements is unaudited. In the opinion of management, all adjustments, all of which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented, have been reflected therein. The results of operations for interim periods do not necessarily indicate the results to be expected for the entire year. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) with respect to the Company’s fiscal year ended December 31, 2009 (the “2009 10-K”) which may be accessed through the SEC’s website at http://www.sec.gov.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company’s consolidated financial statements.

2. Recent Accounting Standards

Revenue Recognition for Multiple-Deliverable Revenue Arrangements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 09-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“ASU 09-13”). The Company adopted this standard on January 1, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

The Company participates in certain arrangements containing multiple deliverables. These arrangements generally consist of custom-created advertising programs delivered on multiple media platforms, as well as licensing programs which may also be supported by various promotional plans. Examples of significant program deliverables include print advertising pages in the Company’s publications, commercial spots and product integrations on the Company’s television and radio programs, and advertising impressions delivered on the Company’s website. Arrangements that were executed prior to January 1, 2010 are accounted for in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” (“ASC 605”). Because the Company has elected to early adopt, on a prospective basis, ASU No. 09-13, arrangements executed on or after January 1, 2010 are subject to the new guidance. ASU 09-13 updates the existing multiple-element arrangement guidance currently in ASC 605.

The determination of units of accounting includes several criteria under both ASC 605 and ASU 09-13. Consistent with ASC 605, ASU 09-13 requires that the Company examine separate contracts with the same entity or related parties that are entered into or near the same time to determine if the arrangements should be considered a single arrangement in the determination of units of accounting. While both ASC 605 and ASU 09-13 require that units delivered have standalone value to the customer, ASU 09-13 modifies the separation criteria in determining units of accounting by eliminating the requirement to obtain objective and reliable evidence of the fair value of undelivered items. As a result of the elimination of this requirement, the Company’s significant program deliverables generally meet the separation criteria under ASU 09-13, whereas under ASC 605 they did not qualify as separate units of accounting.

For those arrangements accounted for under ASC 605, if the Company is unable to put forth objective and reliable evidence of the fair value of each deliverable, then the Company accounts for the deliverables as a combined unit of accounting rather than separate units of accounting. In this case, the arrangement fee is recognized as revenue as the earnings process is completed, generally over the fulfillment term of the last deliverable.

For those arrangements accounted for under ASU 09-13, the Company is required to allocate revenue based on the relative selling price of each deliverable which qualifies as a unit of accounting, even if such deliverables are not sold separately by either the Company itself or other vendors. Determination of selling price is a judgmental process

 

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Table of Contents

Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements—(Continued)

(unaudited)

 

which requires numerous assumptions. The consideration is allocated at the inception of the arrangement to all deliverables based upon their relative selling prices. Selling prices for deliverables that qualify as separate units of accounting are determined using a hierarchy of: (1) vendor-specific objective evidence (“VSOE”), (2) third-party evidence, and (3) best estimate of selling price. The Company is able to establish VSOE for certain of its contract deliverables, however, in most instances it has allocated consideration based upon its best estimate of selling price. The Company established VSOE of certain deliverables by demonstrating that a substantial majority of the recent standalone sales of those deliverables are priced within a relatively narrow range. The Company’s best estimate of selling price is intended to represent the price at which it would sell the deliverable if the Company were to sell the item regularly on a standalone basis. The Company’s estimates consider market conditions, such as competitor pricing pressures, as well as entity-specific factors that are consistent with normal pricing practices, such as the recent history of the selling prices of similar products when sold on a standalone basis, the impact of the cost of customization, the size of the transaction, and other factors contemplated in negotiating the arrangement with the customer. The arrangement fee is recognized as revenue as the earnings process is completed, generally at the time each unit of accounting is fulfilled.

Investments in Other Non-Current Assets

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends certain requirements of FASB Interpretation No. 46(R) (“FIN 46R”) to improve financial reporting by enterprises involved with a variable interest entity (“VIE”) and provides more relevant and reliable information to users of financial statements. Among other changes, the amendments to FIN 46R replaced the then-existing quantitative approach for identifying the party that should consolidate a VIE, which was based on exposure to a majority of the risks and rewards, with a qualitative approach, based on determination of which party has the power to direct the most economically significant activities of the entity. Under the new guidance, a VIE must be consolidated if the enterprise has both (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The new guidance also requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE and amends certain guidance for determining whether an entity is a VIE.

SFAS 167 has a similar scope as FIN 46R, with the addition of entities previously considered qualifying special purpose entities and was effective for the first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter, with earlier application prohibited. In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 09-17”). The purpose of ASU 09-17 is to bring SFAS 167 (as discussed above) into the ASC by amending ASC Topic 810, “Consolidation.” The application of ASU 09-17 did not have an impact on the Company’s financial condition or results of operations.

The Company has cost-based investments which represent investments in preferred stock. As of September 30, 2010, the Company’s aggregate carrying value of these investments was $5.7 million and has been included within other noncurrent assets in the consolidated balance sheet. The Company has determined that certain of these investments represent interests in VIEs. As of September 30, 2010, the Company’s investments in the entities were substantially equal to its maximum exposure to loss. There are no future contractual funding commitments at this time. The Company has determined that the Company is not the primary beneficiary of these entities since the Company does not have the power to direct the activities that most significantly impact the entities’ economic performance. Accordingly, the Company does not consolidate these entities and accounts for these investments under the cost method.

The Company’s other significant accounting policies are discussed in more detail in the 2009 10-K, especially under the heading Note 2, “Summary of Significant Accounting Policies.”

 

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Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements—(Continued)

(unaudited)

 

 

3. Fair Value Measurements

The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are:

 

   

Level 1: Observable inputs such as quoted prices for identical assets and liabilities in active markets obtained from independent sources.

 

   

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data. The fair value of the Company’s level 2 financial assets is primarily obtained from observable market prices for identical underlying securities that may not be actively traded. Certain of these securities may have different market prices from multiple market data sources, in which case a weighted average market price is used.

 

   

Level 3: Unobservable inputs for which there is little or no market data and require the Company to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis:

 

     September 30, 2010  

(in thousands)

   Quoted
Market

Prices in
Active

Markets  for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total
Fair Value
Measurements
 

Cash equivalents:

           

Money market funds

   $ 455       $ —         $ —         $ 455   

Short-term investments:

           

Marketable equity securities

     3,273         —           —           3,273   

U.S. government and agency securities

     —           1,429         —           1,429   

Corporate obligations

     —           6,630         —           6,630   

Other fixed income securities

     —           2,499         —           2,499   

International securities

     —           336         —           336   
                                   

Total

   $ 3,728       $ 10,894       $ —         $ 14,622   
                                   

 

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Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements—(Continued)

(unaudited)

 

     December 31, 2009  

(in thousands)

   Quoted
Market

Prices in
Active

Markets  for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total
Fair Value
Measurements
 

Cash equivalents:

           

Money market funds

   $ 332       $ —         $ —         $ 332   

Short-term investments:

           

Four month certificate of deposit

     —           10,948         —           10,948   

Marketable equity securities

     2,137         —           —           2,137   

Other current assets:

           

Marketable equity securities

     895         —           —           895   
                                   

Total

   $ 3,364       $ 10,948       $ —         $ 14,312   
                                   

Marketable Equity Securities

The cost basis of the marketable equity securities at September 30, 2010 was $2.2 million and the Company recognized $1.1 million through September 30, 2010 in cumulative unrealized gains included in other comprehensive income.

During the third quarter of 2010, the Company sold a portion of its marketable equity securities for a gain of $0.4 million.

Assets measured at fair value on a nonrecurring basis

The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment, as well as cost method investments, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized. Such impairment charges incorporate fair value measurements based on level 3 inputs.

4. Inventory

Inventory is comprised of paper stock. The inventory balances at September 30, 2010 and December 31, 2009 were $5.3 million and $5.2 million, respectively.

5. Credit Facilities

The Company has a line of credit with Bank of America in the amount of $5.0 million, which is generally used to secure outstanding letters of credit. The line was renewed as of June 30, 2010 for a one-year period. There were no substantive changes from the prior year’s terms. The Company was compliant with the debt covenants as of September 30, 2010. The Company had no outstanding borrowings under this facility as of September 30, 2010 and had letters of credit outstanding of $2.6 million.

In April 2008, the Company entered into a loan agreement with Bank of America for a term loan in the amount of $30.0 million related to the acquisition of certain assets of Emeril Lagasse. The loan agreement requires equal principal payments of $1.5 million and accrued interest to be paid by the Company quarterly for the duration of the loan term, approximately 5 years. As of September 30, 2010, the Company has paid $19.5 million in principal, including prepayment of the $4.5 million due through

June 30, 2011. Accordingly, only one principal payment of $1.5 million due as of September 30, 2011 is reflected as a current liability in the consolidated balance sheet as of September 30, 2010. The interest rate on all outstanding amounts is equal to a floating rate of 1-month London Interbank Offered Rate (“LIBOR”) plus 2.85%.

The loan terms require the Company to be in compliance with certain financial covenants, failure with which to comply would result in an event of default and would permit Bank of America to accelerate and demand repayment of the loan in full. The Company was compliant with the debt covenants as of September 30, 2010.

A summary of the most significant financial and other covenants are discussed in more detail in the 2009 10-K, especially under the heading Note 7, “Credit Facilities.”

 

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Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements—(Continued)

(unaudited)

 

 

6. Income taxes

The Company follows ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. ASC 740 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year results than it places on estimates of future taxable income. Therefore, the Company has added $5.8 million to its valuation allowance in the first nine months ended September 30, 2010, resulting in a cumulative balance of $79.0 million as of September 30, 2010. In addition, the Company has recorded $1.3 million of tax expense during the nine months ended September 30, 2010 which is primarily attributable to differences between the financial statement carrying amounts of past acquisitions of certain indefinite-lived intangible assets and their respective tax bases, which resulted in a net deferred tax liability of $4.2 million at September 30, 2010. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax assets could be realized.

ASC 740 further establishes guidance on the accounting for uncertain tax positions. As of September 30, 2010, the Company had an ASC 740 liability balance of $0.3 million, of which $0.2 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate, and $0.1 million represented interest. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2005 and state examinations for the years before 2003. The Company anticipates that as a result of audit settlements and statute closures over the next twelve months, the liability will be reduced through cash payments of approximately $0.1 million.

7. Equity compensation

Prior to May 2008, the Company had several stock incentive plans that permitted the Company to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans were stock options and restricted shares of common stock. The Compensation Committee of the Board of Directors was authorized to grant up to a maximum of 10,000,000 underlying shares of Class A Common Stock under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the “1999 Option Plan”), and up to a maximum of 600,000 underlying shares of Class A Common Stock under the Company’s Non-Employee Director Stock and Option Compensation Plan (the “Non-Employee Director Plan”).

In April 2008, the Company’s Board of Directors adopted the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (the “New Stock Plan”), which was approved by the Company’s stockholders at the Company’s 2008 annual meeting. The New Stock Plan has 10,000,000 shares available for issuance. The New Stock Plan replaced the 1999 Option Plan and Non-Employee Director Plan (together, the “Prior Plans”), which together had an aggregate of approximately 1,850,000 shares still available for issuance. Therefore, the total net effect of the replacement of the Prior Plans and adoption of the New Stock Plan was an increase of approximately 8,150,000 shares of Class A Common Stock available for issuance under the Company’s stock plans.

From time to time the Company makes equity awards to certain employees pursuant to the New Stock Plan. On March 1, 2010, the Company granted awards to multiple recipients. The awards consisted of, in the aggregate, options to purchase 700,000 shares of Class A Common Stock at an exercise price of $5.48 per share (the closing price on the date of grant), which options vest over a four-year period, and 550,000 performance-based restricted stock units, each of which represents the right to a share of the Company’s Class A Common Stock if the Company achieves targets over a performance period.

On March 1, 2010, in recognition of changing economic conditions and to ensure the continued retention and motivation of key employees, the Company’s Compensation Committee approved a modification to the performance conditions associated with the performance-based restricted stock units issued on March 2, 2009.

Consistent with requirements of ASC Topic 718, “Compensation – Stock Compensation,” accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition. During the third quarter of 2010 the Company determined it was not probable that the performance conditions associated with the 2010 and 2009 performance-based restricted stock unit awards would be achieved. Accordingly, non-cash equity compensation expense of approximately $0.6 million was reversed in the quarter.

No other material awards or modifications to awards were made in the nine months ended September 30, 2010.

 

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Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements—(Continued)

(unaudited)

 

 

8. Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss includes net loss and unrealized gains and losses on available-for-sale marketable equity securities. Total comprehensive loss for the three months ended September 30, 2010 and 2009 was $8.4 million and $11.7 million, respectively. Total comprehensive loss for the nine months ended September 30, 2010 and 2009, was $13.0 million and $34.7 million, respectively.

9. Other

Production, distribution and editorial expenses; selling and promotion expenses; and general and administrative expenses are all presented exclusive of depreciation and amortization, which is shown separately within “Operating Costs and Expenses.”

Certain prior year financial information has been reclassified to conform to the 2010 financial statement presentation.

10. Industry Segments

The Company is an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. The Company’s business segments are Publishing, Broadcasting, Internet and Merchandising. The Publishing segment predominantly consists of the Company’s magazine operations and also those related to its book operations. The Broadcasting segment consists of the Company’s television production operations which produce television programming and other licensing revenue from programs that air in syndication and on cable, as well as the Company’s radio operations. The Martha Stewart Show seasons 4 and 5 aired in syndication over a 12-month period beginning and ending in the middle of September. The new season 6 of The Martha Stewart Show currently airs on the Hallmark channel also over a 12-month period beginning and ending in the middle of September. The Internet segment primarily consists of the content-driven website marthastewart.com supported by advertising. The Merchandising segment primarily consists of the Company’s operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing licensees in exchange for royalty income. The accounting policies for the Company’s business segments are discussed in more detail in the 2009 10-K, especially under the heading “Note 2. Summary of Significant Accounting Policies.”

Segment information for the quarters ended September 30, 2010 and 2009 is as follows:

 

(in thousands)

   Publishing     Broadcasting     Internet     Merchandising     Corporate     Consolidated  

2010

            

Revenues

   $ 30,038      $ 5,795      $ 4,280      $ 9,575        —        $ 49,688   

Non-cash equity compensation

     33        3        (15     (50     734        705   

Depreciation and amortization

     69        612        184        13        749        1,627   

Operating (loss) / income

     (368     (4,074     (745     5,501        (8,222     (7,908

2009

            

Revenues

   $ 27,053      $ 11,036      $ 2,761      $ 8,931      $ —        $ 49,781   

Non-cash equity compensation

     967        437        163        714        1,727        4,008   

Depreciation and amortization

     56        699        492        14        835        2,096   

Operating (loss) / income

     (2,480     757        (2,070     3,524        (11,412     (11,681

 

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Martha Stewart Living Omnimedia, Inc.

Notes to Consolidated Financial Statements—(Continued)

(unaudited)

 

 

Segment information for the nine months ended September 30, 2010 and 2009 is as follows:

 

(in thousands)

   Publishing     Broadcasting     Internet     Merchandising      Corporate     Consolidated  

2010

             

Revenues

   $ 88,901      $ 26,076      $ 12,044      $ 31,200         —        $ 158,221   

Non-cash equity compensation

     465        217        17        635         2,841        4,175   

Depreciation and amortization

     169        748        753        35         1,984        3,689   

Operating (loss) / income

     631        (2,354     (2,420     18,154         (26,092     (12,081

2009

             

Revenues

   $ 88,938      $ 31,859      $ 9,543      $ 26,867       $ —        $ 157,207   

Non-cash equity compensation

     1,219        700        234        1,123         3,593        6,869   

Depreciation and amortization

     186        837        1,461        49         3,461        5,994   

Impairment charge

     —          —          —          12,600         —          12,600   

Operating (loss) / income

     (1,356     3,269        (4,574     1,058         (31,665     (33,268

The Company announced on October 27, 2010 that, as a result of its efforts to further streamline and improve efficiencies in the Company’s print and digital operations, which included restructuring the Company’s advertising sales and marketing departments, the Company plans to report the results of operations from its Publishing and Internet segments as a consolidated segment titled “Publishing.”

11. Related Party Transactions

On June 13, 2008, the Company entered into an intangible asset license agreement (the “Intangible Asset License Agreement”) with MS Real Estate Management Company (“MSRE”), an entity owned by Martha Stewart. The Intangible Asset License Agreement replaced the Location Rental Agreement dated as of September 17, 2004, which expired on September 17, 2007, but which was extended by letter agreement dated as of September 12, 2007 pending negotiation of the Intangible Asset License Agreement. The Intangible Asset License Agreement is retroactive to September 18, 2007 and has a five-year term.

Pursuant to the Intangible Asset License Agreement, the Company pays an annual fee of $2.0 million to MSRE over the 5-year term for the perpetual, exclusive right to use Ms. Stewart’s lifestyle intangible asset in connection with Company products and services and during the term of the agreement to access various real properties owned by Ms. Stewart. On February 8, 2010, the Company executed an amendment to the Intangible Asset License Agreement. Pursuant to the amendment, for 2010 only, the annual fee of $2.0 million that would otherwise be payable on or about September 15, 2010 was reduced to $1.95 million and was to be paid in two installments, the first of which was $0.95 million and was paid in February 2010. The remainder of the payment was made during September 2010 as originally scheduled.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-looking Statements and Risk Factors

Except for historical information contained in this Quarterly Report, the statements in this Quarterly Report are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent only our current beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. These statements often can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “potential” or “continue” or the negative of these terms or other comparable terminology. Our actual results may differ materially from those projected in these statements, and factors that could cause such differences include the following among others:

 

   

adverse reactions to publicity relating to Martha Stewart or Emeril Lagasse by consumers, advertisers and business partners;

 

   

a loss of the services of Ms. Stewart or Mr. Lagasse;

 

   

a loss of the services of other key personnel;

 

   

a further softening of or increased competition in the domestic advertising market;

 

   

a failure by the economy to sustain any meaningful recovery, including particularly the housing market and other developments that limit consumers’ discretionary spending or affect the value of our assets or access to credit or other funds;

 

   

loss or failure of merchandising and licensing programs;

 

   

failure in acquiring or developing new brands or realizing the benefits of acquisition;

 

   

inability to attract anticipated levels of viewers to our new programming on Hallmark Channel;

 

   

failure to replace Kmart revenues in the Merchandising segment;

 

   

failure to protect our intellectual property;

 

   

changes in consumer reading, purchasing, Internet and/or television viewing patterns;

 

   

increases in paper, postage or printing costs;

 

   

further weakening in circulation and increased costs of magazine distribution;

 

   

operational or financial problems at any of our contractual business partners;

 

   

the receptivity of consumers to our new product introductions;

 

   

failure to predict, respond to and influence trends in consumer taste, shifts in business strategies, inability to add to our partnerships or capitalize on existing partnerships or the termination of such partnerships; and

 

   

changes in government regulations affecting the Company’s industries.

These and other factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 10-K”) under the heading “Part I, Item 1A. Risk Factors.”

We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.

EXECUTIVE SUMMARY

We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. Our Company has been organized into four business segments with Publishing, Broadcasting and Internet representing our media platforms that are complemented by our Merchandising segment. We announced on October 27, 2010 that, as a result of our efforts to further streamline and improve efficiencies in our print and digital operations, which included restructuring our advertising sales and marketing departments, we plan to report the results of operations from our Publishing and Internet segments as a consolidated segment titled “Publishing.”

In the third quarter of 2010, total revenues were approximately flat with the same quarter in the prior year. Revenues in our Publishing segment increased in the third quarter compared to the prior-year period due primarily to the timing of the fall issue of Martha Stewart Weddings, which was included in the third quarter of 2010, but the fourth quarter of 2009. In addition, Internet segment and Merchandising segment revenues increased compared to the prior year. Offsetting these increases in revenues was a decline in Broadcasting segment revenues primarily due to the absence of revenue from our TurboChef relationship which contributed to revenues in the third quarter of 2009.

 

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Effective with our January 2011 issues of Martha Stewart Living, Everyday Food and Whole Living, we expect to increase our rate bases as follows: Martha Stewart Living rate base to 2.050 million up from 2.025 million in 2010; Everyday Food rate base to 1.025 million up from 1.0 million in 2010; and Whole Living rate base to 700,000 up from 650,000.

Our operating costs and expenses were lower in the third quarter of 2010 compared to the third quarter of 2009. The decline was largely due to lower cash and non-cash bonus accruals as the third quarter of 2009 included a catch-up bonus accrual. In the fourth quarter of 2010, we expect a severance charge to our Corporate segment of less than $1 million related to the recent restructuring of our advertising sales and marketing department.

Media Update. In the third quarter of 2010, revenues from our media platforms decreased from the prior-year period primarily due to reduced revenues in our Broadcasting segment, which was negatively impacted by the absence of TurboChef in this year’s quarter, lower revenue at The Martha Stewart Show in syndication, lower revenue associated with Whatever Martha! and lower guaranteed radio licensing revenue. The decline in the Broadcasting segment was partially offset by increased revenues from our Publishing segment, which benefited from the timing of the fall issue of Martha Stewart Weddings, as well as increased revenues from our Internet segment. The increase in Internet segment revenues in the third quarter of 2010 as compared to the same quarter in 2009 was driven by a 56% increase in advertising revenue. Our unique visitors increased, on average, by 31% from the prior year quarter, according to comScore panel data.

Merchandising Update. In the third quarter of 2010, Merchandising segment revenues were higher due to an increase in revenue from customers other than Kmart, with which our relationship ended during the first quarter of 2010.

 

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Comparison of Three Months Ended September 30, 2010 to Three Months Ended September 30, 2009

PUBLISHING SEGMENT

 

(in thousands)

   Three Months Ended
September 30,
       
   2010
(unaudited)
    2009
(unaudited)
    Better /
(Worse)
 

Publishing Segment Revenues

      

Advertising

   $ 17,799      $ 15,615      $ 2,184   

Circulation

     11,817        11,027        790   

Books

     189        92        97   

Licensing and other

     233        319        (86
                        

Total Publishing Segment Revenues

     30,038        27,053        2,985   
                        

Publishing Segment Operating Costs and Expenses

      

Production, distribution and editorial

     18,095        18,091        (4

Selling and promotion

     10,962        9,653        (1,309

General and administrative

     1,280        1,733        453   

Depreciation and amortization

     69        56        (13
                        

Total Publishing Segment Operating Costs and Expenses

     30,406        29,533        (873
                        

Operating Loss

   $ (368   $ (2,480   $ 2,112   
                        

Publishing revenues increased 11% for the three months ended September 30, 2010 from the prior-year period. Advertising revenue increased $2.2 million primarily due to the timing of the 2010 fall issue of Martha Stewart Weddings which was included in the third quarter of 2010 compared to the 2009 issue which was included in the fourth quarter of 2009. Advertising pages increased in Martha Stewart Living but the revenue contribution was mostly offset by lower advertising overall in Whole Living, lower advertising rates in Martha Stewart Living and fewer advertising pages in Everyday Food. Circulation revenue increased $0.8 million largely due to higher newsstand revenue as the result of the timing of the 2010 fall issue of Martha Stewart Weddings, as well as higher unit sales of Martha Stewart Living, Whole Living and the Halloween special, and lower agency commissions for Whole Living. These increases in circulation revenue were partially offset by the discontinuation of the subscription-based Dr. Andrew Weil’s Self Healing newsletter and lower effective subscription rates per copy for Martha Stewart Living and Everyday Food.

 

Magazine Publication Schedule

   Three months ended
September 30, 2010
   Three Months ended
September 30, 2009

Martha Stewart Living

   Three Issues    Three Issues

Everyday Food

   Two Issues    Two Issues

Martha Stewart Weddings

   One Issue    No Issues

Whole Living (formerly Body + Soul)

   Two Issues    Two Issues

Dr. Andrew Weil’s Self-Healing

   No Issues    Three Issues

Special Interest Publications

   One Issue    One Issue

Production, distribution and editorial expenses were flat for the three months ended September 30, 2010 compared to the prior-year period. Certain production, distribution and editorial expenses increased due to the timing of the 2010 fall issue of Martha Stewart Weddings and higher art and editorial compensation and story costs that were partially related to an upcoming Martha Stewart Living digital initiative. These increases in production, distribution and editorial expenses were fully offset by lower cash and non-cash bonus accruals substantially reflecting the inclusion in the prior-year period of a catch-up bonus accrual. Selling and promotion expenses increased $1.3 million due to higher direct mail investment for Martha Stewart Living, the timing of marketing promotional costs and higher commission expense, partially offset by the lower cash and non-cash bonus accruals in the third quarter of 2010. General and administrative expenses decreased $0.5 million largely due to lower headcount and lower facilities-related charges.

 

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BROADCASTING SEGMENT

 

(in thousands)

   Three Months Ended
September 30,
        
   2010
(unaudited)
    2009
(unaudited)
     Better /
(Worse)
 

Broadcasting Segment Revenues

       

Advertising

   $ 4,131      $ 4,372       $ (241

Radio Licensing

     875        1,875         (1,000

Licensing and other

     789        4,789         (4,000
                         

Total Broadcasting Segment Revenues

     5,795        11,036         (5,241
                         

Broadcasting Segment Operating Costs and Expenses

       

Production, distribution and editorial

     6,839        6,772         (67

Selling and promotion

     853        1,031         178   

General and administrative

     1,565        1,777         212   

Depreciation and amortization

     612        699         87   
                         

Total Broadcasting Segment Operating Costs and Expenses

     9,869        10,279         410   
                         

Operating (Loss) / Income

   $ (4,074   $ 757       $ (4,831
                         

Broadcasting revenues decreased 47% for the three months ended September 30, 2010 from the prior-year period. Advertising revenue decreased $0.2 million largely due to the decline in household ratings and lower advertising rates for season 5 of The Martha Stewart Show in syndication compared with season 4. The decrease in television advertising revenue was mostly offset by an increase in television integrations and the inclusion of advertising revenue from our new radio agreement with Sirius XM, which provides for lower licensing fees than our previous agreement, but also provides an opportunity to replace a portion of the licensing fees through advertising sales. However, as a result of the lower licensing fees in the new radio agreement, radio licensing revenue decreased $1.0 million. Television licensing and other revenue decreased $4.0 million mostly due to the absence of revenue from our TurboChef relationship, which contributed revenues to the third quarter of 2009, as well as the timing of revenues related to Whatever, Martha! which was delivered in the third quarter of 2009 and is expected to be delivered in the fourth quarter of 2010. In addition, licensing and other revenue declined due to lower licensing revenues related to Emeril Lagasse’s television programming and the timing of our international license renewals.

General and administrative expenses decreased $0.2 million due to lower cash and non-cash bonus accruals, mostly reflecting the inclusion in the prior-year period of a catch-up bonus accrual.

 

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INTERNET SEGMENT

 

(in thousands)

   Three Months  Ended
September 30,
       
   2010
(unaudited)
    2009
(unaudited)
    Better /
(Worse)
 

Internet Segment Revenues

      

Advertising

   $ 4,260      $ 2,735      $ 1,525   

Other

     20        26        (6
                        

Total Internet Segment Revenues

     4,280        2,761        1,519   
                        

Internet Segment Operating Costs and Expenses

      

Production, distribution and editorial

     2,292        2,166        (126

Selling and promotion

     2,173        1,787        (386

General and administrative

     376        386        10   

Depreciation and amortization

     184        492        308   
                        

Total Internet Segment Operating Costs and Expenses

     5,025        4,831        (194
                        

Operating Loss

   $ (745   $ (2,070   $ 1,325   
                        

Internet revenues increased 55% for the three months ended September 30, 2010 from the prior-year period. Advertising revenue increased $1.5 million due to an increase in sold advertising volume, as well as higher overall rates.

Production, distribution and editorial costs increased $0.1 million from the prior-year period due to higher compensation costs from increased headcount, partially offset by lower cash and non-cash bonus accruals mostly reflecting the inclusion in the prior-year period of a catch-up bonus accrual. Selling and promotion expenses increased $0.4 million due to additional website infrastructure investment, higher consumer marketing costs and higher commissions. Depreciation and amortization expenses decreased $0.3 million primarily due to the full depreciation by the second quarter of 2010 of the costs associated with the 2007 launch of our redesigned website.

 

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MERCHANDISING SEGMENT

 

(in thousands)

   Three Months Ended
September 30,
        
   2010
(unaudited)
     2009
(unaudited)
     Better /
(Worse)
 

Merchandising Segment Revenues

        

Royalty and other

   $ 9,575       $ 7,373       $ 2,202   

Kmart earned royalty

     —           1,558         (1,558
                          

Total Merchandising Segment Revenues

     9,575         8,931         644   
                          

Merchandising Segment Operating Costs and Expenses

        

Production, distribution and editorial

     1,958         2,703         745   

Selling and promotion

     815         761         (54

General and administrative

     1,288         1,929         641   

Depreciation and amortization

     13         14         1   
                          

Total Merchandising Segment Operating Costs and Expenses

     4,074         5,407         1,333   
                          

Operating Income

   $ 5,501       $ 3,524       $ 1,977   
                          

Merchandising revenues increased 7% for the three months ended September 30, 2010 from the prior-year period. Royalty and other revenue increased $2.2 million due to the contributions from our new merchandising relationships and higher royalty rates and sales volume from certain of our existing partners. These increases in royalty and other revenue were partially offset by the absence of revenue from our TurboChef and 1-800-Flowers.com relationships, which both contributed revenues to the third quarter of 2009. In addition, the prior-year period included $1.6 million of revenues related to our agreement with Kmart, which ended in January 2010.

Production, distribution and editorial expenses decreased $0.7 million due to lower cash and non-cash bonus accruals mostly reflecting the inclusion in the prior-year period of catch-up bonus accrual, as well as lower allocated facilities costs. The allocation policy for facilities expenses changed in 2010 for the Merchandising segment only. All allocated rent and facilities charges are now reflected as overhead costs in the general and administrative expense category in the Merchandising segment instead of allocated throughout the various expense categories. This allocation change does not impact any of our other business segments. General and administrative costs decreased $0.6 million primarily due to lower cash and non-cash bonus accruals, partially offset by higher allocated facilities costs due to the change in policy described above.

 

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CORPORATE

 

(in thousands)

   Three Months Ended
September 30,
       
   2010
(unaudited)
    2009
(unaudited)
    Better /
(Worse)
 

Corporate Operating Costs and Expenses

      

General and administrative

   $ 7,473      $ 10,577      $ 3,104   

Depreciation and amortization

     749        835        86   
                        

Total Corporate Operating Costs and Expenses

     8,222        11,412        3,190   
                        

Operating Loss

   $ (8,222   $ (11,412   $ 3,190   
                        

Corporate operating costs and expenses decreased 28% for the three months ended September 30, 2010 from the prior-year period. General and administrative expenses decreased $3.1 million due to lower cash and non-cash bonus accruals mostly reflecting the inclusion in the prior-year period of a catch-up bonus accrual, as well as lower rent expense from the consolidation of certain offices.

OTHER ITEMS

Interest income / (expense), net. Interest income, net, was $0.05 million for the three months ended September 30, 2010 compared to interest expense, net, of $(0.0) million for the prior-year period.

Loss on sale of fixed asset. Loss on the sale of a fixed asset was $0.6 million for the three months ended September 30, 2010 with no comparable loss in the prior-year period.

Gain on sale of short-term investments. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $0.4 million for the three months ended September 30, 2010 with no comparable gain in the prior-year period.

Loss on equity securities. Loss on equity securities was $0.01 million for the three months ended September 30, 2010 with no comparable loss in the prior-year period. The losses were the result of marking certain assets to fair value in accordance with accounting principles governing derivative instruments.

Income tax expense. Income tax expense for the three months ended September 30, 2010 was $0.5 million, compared to a $0.4 million in the prior-year period.

Net loss. Net loss was $8.6 million for the three months ended September 30, 2010 compared to net loss of $12.1 million for the three months ended September 30, 2009, as a result of the factors described above.

 

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Comparison of Nine Months Ended September 30, 2010 to Nine Months Ended September 30, 2009

PUBLISHING SEGMENT

 

     Nine Months Ended
September 30,
       

(in thousands)

   2010
(unaudited)
     2009
(unaudited)
    Better /
(Worse)
 

Publishing Segment Revenues

       

Advertising

   $ 53,550       $ 50,652      $ 2,898   

Circulation

     33,611         36,680        (3,069

Books

     1,036         875        161   

Licensing and other

     704         731        (27
                         

Total Publishing Segment Revenues

     88,901         88,938        (37
                         

Publishing Segment Operating Costs and Expenses

       

Production, distribution and editorial

     53,017         53,081        64   

Selling and promotion

     31,387         32,012        625   

General and administrative

     3,697         5,015        1,318   

Depreciation and amortization

     169         186        17   
                         

Total Publishing Segment Operating Costs and Expenses

     88,270         90,294        2,024   
                         

Operating Income / (Loss)

   $ 631       $ (1,356   $ 1,987   
                         

Publishing revenues were essentially flat for the nine months ended September 30, 2010 compared to the prior-year period. Advertising revenue increased $2.9 million primarily due to the timing of the 2010 fall issue of Martha Stewart Weddings which was included in the third quarter of 2010 compared to the 2009 issue which was included in the fourth quarter of 2009. Advertising pages increased in Martha Stewart Living, Whole Living and Martha Stewart Weddings, but the revenue contribution was partially offset by lower advertising rates across all magazines. Circulation revenue decreased $3.1 million largely due to lower effective subscription rates per copy for Martha Stewart Living and Everyday Food and higher related agency commissions, as well as the discontinuation of the subscription-based Dr. Andrew Weil’s Self Healing newsletter. Circulation revenue for the first nine months of 2010 was also impacted by lower unit sales of Martha Stewart Living and Everyday Food and the discontinuation of the newsstand-based Weil special interest publication, partially offset by the timing of the 2010 fall issue of Martha Stewart Weddings and an increase in unit sales of Whole Living.

 

Magazine Publication Schedule

  

Nine Months ended

September 30, 2010

  

Nine Months ended

September 30, 2009

Martha Stewart Living

   Nine Issues    Nine Issues

Everyday Food

   Eight Issues    Eight Issues

Martha Stewart Weddings

   Three Issues    Two Issues

Whole Living (formerly Body + Soul)

   Seven Issues    Seven Issues

Dr. Andrew Weil’s Self Healing

   No Issues    Nine Issues

Special Interest Publications

   One Issue    Two Issues

Production, distribution and editorial expenses decreased $0.1 million largely due to lower paper costs and lower cash and non-cash bonus accruals, partially offset by higher art and editorial compensation and story costs. Selling and promotion expenses decreased $0.6 million due to lower newsstand-related costs, the discontinuation of Dr. Andrew Weil’s Self Healing newsletter and special interest publications and lower advertising and consumer marketing staff costs including lower cash and non-cash bonus accruals. These decreases in selling and promotion expenses were partially offset by higher direct mail investment for Martha Stewart Living and the timing of marketing promotional costs. General and administrative expenses decreased $1.3 million largely due to lower headcount and lower facilities-related charges.

 

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BROADCASTING SEGMENT

 

(in thousands)

   Nine Months Ended
September 30,
        
   2010
(unaudited)
    2009
(unaudited)
     Better /
(Worse)
 

Broadcasting Segment Revenues

       

Advertising

   $ 14,972      $ 16,453       $ (1,481

Radio Licensing

     2,625        5,625         (3,000

Licensing and other

     8,479        9,781         (1,302
                         

Total Broadcasting Segment Revenues

     26,076        31,859         (5,783
                         

Broadcasting Segment Operating Costs and Expenses

       

Production, distribution and editorial

     20,912        21,127         215   

Selling and promotion

     2,448        2,175         (273

General and administrative

     4,322        4,451         129   

Depreciation and amortization

     748        837         89   
                         

Total Broadcasting Segment Operating Costs and Expenses

     28,430        28,590         160   
                         

Operating (Loss) / Income

   $ (2,354   $ 3,269       $ (5,623
                         

Broadcasting revenues decreased 18% for the nine months ended September 30, 2010 from the prior-year period. Advertising revenue decreased $1.5 million primarily due to the decline in household ratings for season 5 of The Martha Stewart Show in syndication compared with season 4. The decrease was partially offset by an increase in the quantity of integrations at higher rates and the inclusion of advertising revenue from our new radio agreement with Sirius XM, which provides for lower licensing fees than our previous agreement, but also provides an opportunity to replace a portion of the licensing fees through advertising sales. However, as a result of the lower licensing fees in the new radio agreement, radio licensing revenue decreased $3.0 million. Television licensing and other revenue decreased $1.3 million due to the absence of revenue from our TurboChef relationship, which contributed revenues in 2009, as well as the timing of revenues related to Whatever, Martha! which was delivered in the third quarter of 2009 and is expected to be delivered in the fourth quarter of 2010. In addition, licensing and other revenue declined due to lower licensing revenues related to Emeril Lagasse’s television programming and the timing of our international license renewals. The decreases in licensing and other revenue were partially offset by the recognition of substantially all of the exclusive license fee which represents approximately $5.0 million from Hallmark Channel for a significant portion of our library of programming.

Production, distribution and editorial expenses decreased $0.2 million due to lower distribution fees and production cost savings related to season 5 of The Martha Stewart Show as compared to the prior year’s season 4. These savings were partially offset by the full recognition of production costs for The Emeril Lagasse Show. Selling and promotion expenses increased $0.3 million due to an increase in headcount and higher compensation-related costs.

 

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INTERNET SEGMENT

 

      Nine Months Ended
September 30,
       

(in thousands)

   2010
(unaudited)
    2009
(unaudited)
    Better /
(Worse)
 

Internet Segment Revenues

      

Advertising

   $ 11,914      $ 9,445      $ 2,469   

Other

     130        98        32   
                        

Total Internet Segment Revenues

     12,044        9,543        2,501   
                        

Internet Segment Operating Costs and Expenses

      

Production, distribution and editorial

     6,340        5,892        (448

Selling and promotion

     6,171        5,292        (879

General and administrative

     1,200        1,472        272   

Depreciation and amortization

     753        1,461        708   
                        

Total Internet Segment Operating Costs and Expenses

     14,464        14,117        (347
                        

Operating Loss

   $ (2,420   $ (4,574   $ (2,154
                        

Internet revenues increased 26% for the nine months ended September 30, 2010 from the prior-year period. Advertising revenue increased $2.5 million due to an increase in sold advertising volume. Overall rates were lower for the nine-month period ended September 30, 2010 compared to the prior-year period, despite an increase in rates in the third quarter of 2010 as compared to the third quarter of 2009.

Production, distribution and editorial costs increased $0.4 million from the prior-year period due to higher compensation costs from increased headcount, partially offset by lower cash and non-cash bonus accruals. Selling and promotion expenses increased $0.9 million due to additional website infrastructure investment, higher consumer marketing costs, higher commissions and higher compensation expenses from increased headcount. General and administrative expenses decreased $0.3 million due to reduced headcount as compared to the prior-year period. Depreciation and amortization expenses decreased $0.7 million primarily due to the full depreciation by the second quarter of 2010 of the costs associated with the 2007 launch of our redesigned website.

 

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MERCHANDISING SEGMENT

 

     Nine Months Ended
September 30,
        

(in thousands)

   2010
(unaudited)
     2009
(unaudited)
     Better /
(Worse)
 

Merchandising Segment Revenues

        

Royalty and other

   $ 30,015       $ 19,212       $ 10,803   

Kmart earned royalty

     1,071         6,716         (5,645

Kmart minimum true-up

     114         939         (825
                          

Total Merchandising Segment Revenues

     31,200         26,867         4,333   
                          

Merchandising Segment Operating Costs and Expenses

        

Production, distribution and editorial

     5,568         7,112         1,544   

Selling and promotion

     2,883         2,090         (793

General and administrative

     4,560         3,958         (602

Depreciation and amortization

     35         49         14   

Impairment on equity investment

     —           12,600         12,600   
                          

Total Merchandising Segment Operating Costs and Expenses

     13,046         25,809         12,763   
                          

Operating Income

   $ 18,154       $ 1,058       $ 17,096   
                          

Merchandising revenues increased 16% for the nine months ended September 30, 2010 from the prior-year period. Royalty and other revenue increased $10.8 million mostly due to the contributions of our new merchandising relationships, higher royalty rates and sales volume from certain of our existing partners, the additional one-time revenue from the early termination of our agreement with 1-800-Flowers.com and a one-time $1.0 million payment received from a manufacturing partner. These increases in royalty and other revenue were partially offset by the absence of revenue from our TurboChef relationship, which contributed revenues in 2009. In addition, the prior-year period included $7.7 million of revenues related to our agreement with Kmart. The pro-rata portion of revenues related to the contractual minimum amounts from Kmart covering the nine months ended September 30, 2010 and 2009 is listed separately above as Kmart minimum true-up.

Production, distribution and editorial expenses decreased $1.5 million due to lower allocated facilities costs, as compared to the prior-year period, as well as lower cash and non-cash bonus accruals. The allocation policy for facilities expenses changed in 2010 for the Merchandising segment only. All allocated rent and facilities charges are now reflected in the Merchandising segment in the general and administrative expense category. This allocation change does not impact any of our other business segments. Selling and promotion expenses increased $0.8 million mostly as a result of services that we provide to our partners for reimbursable creative services projects, as well as higher consulting fees. General and administrative costs increased $0.6 million largely due to higher allocated facilities costs due to the change in policy described above, as well as higher compensation expenses, partially offset by lower cash and non-cash bonus accruals. In the nine months ended September 30, 2009, we recorded non-cash impairment charges of $12.6 million related to our cost-based equity investment in United Craft MS Brands, LLC.

 

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CORPORATE

 

     Nine Months Ended
September 30,
       

(in thousands)

   2010
(unaudited)
    2009
(unaudited)
    Better /
(Worse)
 

Corporate Operating Costs and Expenses

      

General and administrative

   $ 24,108      $ 28,204      $ 4,096   

Depreciation and amortization

     1,984        3,461        1,477   
                        

Total Corporate Operating Costs and Expenses

     26,092        31,665        5,573   
                        

Operating Loss

   $ (26,092   $ (31,665   $ 5,573   
                        

Corporate operating costs and expenses decreased 18% for the nine months ended September 30, 2010 from the prior-year period. General and administrative expenses decreased $4.1 million due to lower rent expense from the consolidation of certain offices and lower cash and non-cash bonus accruals and lower compensation and related expenses. Depreciation and amortization expenses decreased $1.5 million due to lower depreciation expense also related to the relocation of our office space.

OTHER ITEMS

Interest expense, net. Interest expense, net, was $0.1 million for both the nine months ended September 30, 2010 and 2009.

Loss on sale of fixed asset. Loss on the sale of a fixed asset was $0.6 million for the nine months ended September 30, 2010 with no comparable loss in the prior-year period.

Gain on sale of short-term investments. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $0.4 million for the nine months ended September 30, 2010 and $0.3 million in the prior-year period.

Loss on equity securities. Loss on equity securities was $0.02 million for the nine months ended September 30, 2010 compared to $0.9 million in the prior-year period. The losses were the result of marking certain assets to fair value in accordance with accounting principles governing derivative instruments.

Other Loss. Other loss was $0.2 million for the nine months ended September 30, 2009 with no comparable loss in the current period. The other loss in 2009 was related to certain investments in equity securities that were previously accounted for under the equity method but, since the second quarter of 2009, have been accounted for under the cost method.

Income tax expense. Income tax expense for the nine months ended September 30, 2010 was $1.3 million, compared to a $1.2 million in the prior-year period.

Net Loss. Net loss was $13.7 million for the nine months ended September 30, 2010, compared to a net loss of $35.3 million for the nine months ended September 30, 2009, as a result of the factors described above.

 

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Liquidity and Capital Resources

Overview

During the first nine months of 2010, our overall cash, cash equivalents and short-term investments increased $2.9 million from December 31, 2009. The increase was due to the satisfaction of our 2009 year-end receivable due from Kmart and other advertising receivables, partially offset by capital expenditures and principal pre-payments of our loan with Bank of America. Cash, cash equivalents and short-term investments were $41.4 million and $38.5 million at September 30, 2010 and December 31, 2009, respectively. In addition, as of September 30, 2010, we had $1.0 million in receivables that represents cash proceeds from the sale of certain marketable equity securities that was settled during the first week of October 2010.

While we have generated cash from operating activities in excess of cash used in investing and financing activities for the first nine months of 2010, we anticipate an overall use of cash for the full year 2010. However, we believe that our available cash balances and short-term investments will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next twelve months.

Cash Flows from Operating Activities

Our cash inflows from operating activities are generated by our business segments from revenues, as described previously in the business segment discussions, which include cash from advertising customers, licensing partners and magazine circulation sales. Operating cash outflows generally include employee and related costs, the physical costs associated with producing magazines and our television shows and the cash costs of facilities.

Cash provided by / (used in) operating activities was $7.0 million and $(1.9) million for the nine months ended September 30, 2010 and 2009, respectively. During the first nine months of 2010, cash from operations increased primarily due to the satisfaction of the 2009 year-end receivable due from Kmart and other advertising receivables. The increase in cash from operations was partially offset by our operating loss, as discussed earlier, net of non-cash factors including the receivable related to the recognition of substantially all of the exclusive license fee which represents approximately $5.0 million from Hallmark Channel for a significant portion of our library of programming.

Cash Flows from Investing Activities

Our cash inflows from investing activities generally include proceeds from the sale of short-term investments. Investing cash outflows generally include payments for short- and long-term investments, additions to property, plant, and equipment, and for the acquisition of new businesses.

Cash used in investing activities was $2.2 million and $6.9 million for the nine months ended September 30, 2010 and 2009, respectively. During the first nine months of 2010, cash flow used in investing activities reflected $4.2 million of cash used for capital improvements primarily in conjunction with our relocation and consolidation of certain offices. The cash used for capital expenditures was partially offset by the cash received from the sale of certain fixed assets.

Cash Flows from Financing Activities

Our cash inflows from financing activities generally include proceeds from the exercise of stock options for our Class A Common Stock issued under our equity incentive plans. Cash outflows from financing activities generally include principal repayment of outstanding debt and debt issuance costs.

Cash flows used in financing activities were $2.9 million and $19.4 million for the nine months ended September 30, 2010 and 2009. During the first nine months of 2010, we made $3.0 million in principal pre-payments on our term loan with Bank of America.

Debt

We have a line of credit with Bank of America in the amount of $5.0 million, which is generally used to secure outstanding letters of credit. The line was renewed as of June 30, 2010 for a one-year period. The renewal did not include any substantive changes from the prior year’s terms. We were compliant with the debt covenants as of September 30, 2010. We had no outstanding borrowings under this facility as of September 30, 2010 and had letters of credit outstanding of $2.6 million.

 

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Table of Contents

 

In April 2008, we entered into a loan agreement with Bank of America for a term loan in the amount of $30.0 million related to the acquisition of certain assets of Emeril Lagasse. The loan agreement requires equal principal payments of $1.5 million and accrued interest to be paid quarterly for the duration of the loan term, approximately 5 years. In aggregate, as of September 30, 2010, we had paid $19.5 million in principal on the term loan, including prepayment of the $4.5 million due through June 30, 2011. At September 30, 2010, the outstanding balance under the loan was $10.5 million. The interest rate is equal to a floating rate of 1-month London Interbank Offered Rate (“LIBOR”) plus 2.85%.

The loan terms require us to be in compliance with certain financial and other covenants, failure with which to comply would result in an event of default and would permit Bank of America to accelerate and demand repayment of the loan in full. We were compliant with the debt covenants, some of which are rolling twelve-month covenants, as of September 30, 2010. However, because we will lose the benefit of certain one-time, non-recurring results that positively impacted the fourth quarter of 2009 that will be absent from the fourth quarter of 2010, we anticipated that we would be in violation of the covenants of the loan agreement that require us to maintain a Funded Debt to EBITDA Ratio (as defined in the loan agreement) equal to or less than 2.0 and a Parent Guarantor Basic Fixed Charge Ratio (as defined in the loan agreement) equal to or greater than 2.75 as of the twelve month period ending December 31, 2010. To avoid an event of default, we have executed a waiver in respect of the maintenance of these covenants of the loan agreement with Bank of America that applies to the fourth quarter of 2010 and the first quarter of 2011. See Note 7 of the Notes to the Financial Statements contained in our 2009 Annual Report for additional information about our loan agreement with Bank of America.

Seasonality and Quarterly Fluctuations

Our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules and seasonality of certain types of advertising. Advertising revenue from our Broadcasting segment is highly dependent on ratings which fluctuate throughout the television season following general viewer trends. Ratings tend to be highest during the fourth quarter and lowest in the summer months. Certain aspects of our business related to Emeril Lagasse also fluctuate based on production schedules since this revenue is generally recognized when services are performed. In our Internet segment, advertising revenue on marthastewart.com and our other websites is tied to traffic among other key factors and is typically highest in the fourth quarter of the year. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality and performance of certain product lines. In addition, we have historically recognized the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount was determined. Our agreement with Kmart ended in January 2010.

Off-Balance Sheet Arrangements

At September 30, 2010, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have had or are likely to have a material current or future effect on our financial statements.

Critical Accounting Policies and Estimates

General

Our accounting policies are described in Note 1 to the Consolidated Financial Statements in our 2009 10-K. As discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2009 10-K, we consider an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on our results of operations. These critical estimates include those related to revenue recognition, allowance for doubtful accounts and sales returns, television production costs, valuation of long-lived assets, goodwill and other intangible assets, income taxes, and non-cash equity compensation. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates. Since the date of the 2009 10-K, there have been no changes to our critical accounting policies and estimates except for two items, as follows:

 

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Revenue Recognition

We participate in certain arrangements containing multiple deliverables. These arrangements generally consist of custom-created advertising programs delivered on multiple media platforms, as well as licensing programs which may also be supported by various promotional plans. Examples of significant program deliverables include print advertising pages in our publications, commercial spots and product integrations on our television and radio programs, and advertising impressions delivered on our website. Arrangements that were executed prior to January 1, 2010 are accounted for in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” (“ASC 605”). Because we elected to early adopt, on a prospective basis, Financial Accounting Standards Board (“FASB”) ASU No. 09-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“ASU 09-13”), arrangements executed on or after January 1, 2010 are subject to the new guidance. ASU 09-13 updates the existing multiple-element arrangement guidance currently in ASC 605.

The determination of units of accounting includes several criteria under both ASC 605 and ASU 09-13. Consistent with ASC 605, ASU 09-13 requires that we examine separate contracts with the same entity or related parties that are entered into or near the same time to determine if the arrangements should be considered a single arrangement in the determination of units of accounting. While both ASC 605 and ASU 09-13 require that units delivered have standalone value to the customer, ASU 09-13 modifies the separation criteria in determining units of accounting by eliminating the requirement to obtain objective and reliable evidence of the fair value of undelivered items. As a result of the elimination of this requirement, our significant program deliverables generally meet the separation criteria under ASU 09-13, whereas under ASC 605 they did not qualify as separate units of accounting.

For those arrangements accounted for under ASC 605, if we are unable to put forth objective and reliable evidence of the fair value of each deliverable, then we account for the deliverables as a combined unit of accounting rather than separate units of accounting. In this case, the arrangement fee is recognized as revenue as the earnings process is completed, generally over the fulfillment term of the last deliverable.

For those arrangements accounted for under ASU 09-13, we are required to allocate revenue based on the relative selling price of each deliverable which qualifies as a unit of accounting, even if such deliverables are not sold separately by us or other vendors. Determination of selling price is a judgmental process which requires numerous assumptions. The consideration is allocated at the inception of the arrangement to all deliverables based upon their relative selling prices. Selling prices for deliverables that qualify as separate units of accounting are determined using a hierarchy of: (1) vendor-specific objective evidence (“VSOE”), (2) third-party evidence, and (3) best estimate of selling price. We are able to establish VSOE for certain of our contract deliverables, however, in most instances we have allocated consideration based upon its best estimate of selling price. We established VSOE of certain deliverables by demonstrating that a substantial majority of the recent standalone sales of those deliverables are priced within a relatively narrow range. Our best estimate of selling price is intended to represent the price at which it would sell the deliverable if we were to sell the item regularly on a standalone basis. Our estimates consider market conditions, such as competitor pricing pressures, as well as entity-specific factors that are consistent with normal pricing practices, such as the recent history of the selling prices of similar products when sold on a standalone basis, the impact of the cost of customization, the size of the transaction, and other factors contemplated in negotiating the arrangement with the customer. The arrangement fee is recognized as revenue as the earnings process is completed, generally at the time each unit of accounting is fulfilled.

Non-Cash Equity Compensation

We currently have a stock incentive plan that permits us to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives that have been granted under the plan have been restricted shares of common stock, performance-based restricted stock units and stock options. Restricted shares are valued at the market value of traded shares on the date of grant. Performance-based restricted stock unit awards are accrued as compensation expense based on the probable outcome of the performance condition, consistent with requirements of ASC Topic 718, “Compensation – Stock Compensation.” Stock options are valued using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires numerous assumptions, including expected volatility of our stock price and expected life of the option.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to certain market risks as the result of our use of financial instruments, in particular the potential market value loss arising from adverse changes in interest rates as well as from adverse changes in our publicly traded investment. We also hold a derivative financial instrument that could expose us to further market risk. We do not utilize financial instruments for trading purposes.

 

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Interest Rates

We are exposed to market rate risk due to changes in interest rates on our loan agreement with Bank of America that we entered into on April 2, 2008 under which we borrowed $30.0 million to fund a portion of the acquisition of certain assets of Emeril Lagasse. Interest rates applicable to amounts outstanding under this facility are at variable rates based on the 1-month LIBOR plus 2.85% and averaged 3.14% for the quarter ended September 30, 2010. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows but does not impact the fair value of the instrument. We had outstanding borrowings of $10.5 million on the loan at September 30, 2010. A one percentage point increase in the interest rate from the quarterly average would have increased interest expense by $0.03 million for the three months ended September 30, 2010.

We also have exposure to market rate risk for changes in interest rates as those rates relate to our investment portfolio. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the United States Government and its agencies, in high-quality corporate issuers and, by internal policy, limit both the term and amount of credit exposure to any one issuer. As of September 30, 2010, net unrealized gains and losses on these investments were not material. Our future investment income may fluctuate due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. A one percentage point decrease in average interest rates would have decreased interest income by $0.1 million for the three months ended September 30, 2010.

Stock Prices

We own marketable equity securities in a publicly traded company that is subject to market price volatility. This investment had an aggregate fair value of approximately $3.3 million as of September 30, 2010. A hypothetical decrease in the market price of this investment of 10% would result in a fair value of approximately $3.0 million. The hypothetical decrease in fair value of $0.3 million would be recorded in shareholders’ equity as other comprehensive loss, as any change in fair value of our publicly-traded equity securities are not recognized on our statement of operations, unless the loss is deemed other-than-temporary.

 

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as of the end of the period covered by this report. Based upon that evaluation, our Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our management, including our Principal Executive Officer and Chief Financial Officer, we have determined that, during the third quarter of fiscal 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

The Company is party to legal proceedings in the ordinary course of business, including product liability claims for which we are indemnified by our licensees. None of these proceedings is deemed material.

 

ITEM 1A. RISK FACTORS

There have been no material changes from legal proceedings as previously disclosed in the 2009 10-K, under the heading Part I, Item 1A, “Risk Factors.”

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

(a) None.

 

(b) None.

 

(c) Issuer Purchases of Equity Securities

The following table provides information about our purchases of our Class A Common Stock during each month of the quarter ended September 30, 2010:

 

     (a)      (b)      (c)      (d)  

Period

   Total Number of
Shares (or Units)
Purchased (1)
     Average Price Paid
per Share (or Unit)
     Total Number of
Shares (or Units)
Purchased as Part  of
Publicly Announced
Plans or Programs
     Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that may yet be
Purchased under the
Plans or Programs
 

July 2010

     22,227       $ 4.87         Not applicable         Not applicable   

August 2010

     —           —           Not applicable         Not applicable   

September 2010

     278       $ 4.69         Not applicable         Not applicable   
                 

Total for quarter ended September 30, 2010

     22,505       $ 4.83         Not applicable         Not applicable   

 

(1) Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our stock incentive plan allowing us to withhold, or the recipient to deliver to us, the number of shares of our Class A Common Stock having the fair value equal to tax withholding due.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

 

ITEM 4. RESERVED.

 

ITEM 5. OTHER INFORMATION.

On November 1, 2010, Bank of America, N.A. (the “Bank”) executed a waiver under the Amended and Restated Loan Agreement among the Bank and Martha Stewart Living Omnimedia, Inc. and its wholly-owned subsidiary, MSLO Emeril Acquisition Sub LLC dated as of August 7, 2009, pursuant to which the Bank agreed to waive the application of the covenants set forth in Section 8.2 (Funded Debt to EBITDA Ratio) and Section 8.3 (Parent Guarantor Basic Fixed Charge Coverage Ratio) of the Amended and Restated Loan Agreement with respect to the last day of each of the fiscal quarters ending December 31, 2010 and March 31, 2011.

 

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Table of Contents

 

ITEM 6. EXHIBITS.

 

Exhibit
Number

  

Exhibit Title

10.1    Waiver dated as of November 1, 2010, to the Amended and Restated Loan Agreement, dated as of August 7, 2009, by and among Bank of America, N.A., MSLO Emeril Acquisition Sub LLC and Martha Stewart Living Omnimedia, Inc.
10.2    Amendment dated as of October 29, 2010 to the Employment Agreement, dated as of September 17, 2008, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman.
31.1    Certification of Principal Executive Officer
31.2    Certification of Chief Financial Officer
32       Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

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Table of Contents

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MARTHA STEWART LIVING OMNIMEDIA, INC.

Date:

  November 4, 2010
  /S/    KELLI TURNER        
Name:   Kelli Turner
Title:   Chief Financial Officer
  (Principal Financial Officer and duly authorized officer)

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit
Number

  

Exhibit Title

10.1    Waiver dated as of November 1, 2010, to the Amended and Restated Loan Agreement, dated as of August 7, 2009, by and among Bank of America, N.A., MSLO Emeril Acquisition Sub LLC and Martha Stewart Living Omnimedia, Inc.
10.2    Amendment dated as of October 29, 2010 to the Employment Agreement, dated as of September 17, 2008, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman.
31.1    Certification of Principal Executive Officer
31.2    Certification of Chief Financial Officer
32       Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

33

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