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| MSO > SEC Filings for MSO > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
• 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 continued or further downturn in the economy, 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;
• 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; and
• changes in government regulations affecting the Company's industries.
These and other factors are discussed in this Quarterly Report on Form 10-Q
under the heading "Part II. Other Information, 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 is organized into four business segments with Publishing,
Broadcasting and Internet representing our media platforms that are complemented
by our Merchandising segment. In the third quarter of 2009, total revenues
decreased approximately 25% from the same quarter the prior year due primarily
to the declines in print and television advertising revenue. Revenues also
decreased due to the prior year revenue true-up from Sears Canada, a
relationship that expired in the third quarter of 2008 as well as the decline in
sales from Kmart and lower revenue from Emeril Lagasse's television programming.
Our operating costs and expenses were lower in the third quarter of 2009
primarily due to one-time Corporate charges of $3.5 million in the prior-year
period, as well as from savings in our Publishing and Broadcasting segments
which had lower production, distribution and editorial costs and lower selling
and promotion expenses. In addition, we also reduced our general and
administrative expenses across all segments. These savings are partially due to
an approximately 13% reduction of Company-wide headcount as compared to the
third quarter of 2008. The third quarter of 2009 includes a catch-up bonus
accrual which is comprised of both cash and non-cash components. We expect
smaller cash and non-cash accruals and the payment of bonuses to be made in the
fourth quarter of 2009.
We ended the quarter with $34.4 million in cash, cash equivalents and
short-term investments. Our overall liquidity decreased from December 31, 2008
due to cash used to collateralize and partially prepay the outstanding principal
of our term loan, for capital expenditures and for general operations.
Media Update. In the third quarter of 2009, revenues from our media platforms
declined from the prior-year period mostly due to decreased advertising revenues
in our Publishing segment as the result of fewer pages sold, in our Broadcasting
segment as the result of lower ratings and timing of advertiser spending for
integrations, and in our Internet segment as the result of the timing of
advertiser spending. The declines in media revenues were further affected by
certain one-time payments in the prior-year period related to Emeril Lagasse's
television programming. However, based on our current outlook, we expect to see
improvement in our Publishing segment advertising revenues for the fourth
quarter as well as significant improvement in our Internet segment advertising
revenues, although we have limited visibility beyond the fourth quarter.
Publishing
Advertising revenues declined in the third quarter of 2009 from the same
quarter of 2008 mostly due to a decrease in pages. Circulation revenues also
declined as subscription revenues decreased due to lower effective rates and
higher agent commission expense, partially offset by higher volume of copies
served. Additionally, circulation revenues decreased from lower volume of
newsstand sales fully offset by the timing of a special issue. The decline in
revenues was partially offset by decreases in all expense categories including
production, editorial, circulation marketing, and advertising costs. These cost
savings included savings from lower page volume, lower paper costs and from
reduced discretionary spending, as well as lower compensation costs from staff
reductions. As we enter the fourth quarter, print advertising revenue is
expected to stabilize as compared to the prior-year period.
Broadcasting
Broadcasting segment revenues were lower in the third quarter of 2009 as
compared to the prior-year period due to certain one-time payments in the
prior-year period related to Emeril Lagasse's television programming as well as
from lower ratings and the timing of advertiser spending for integrations. The
Martha Stewart Show continues to maintain its core audience.
Internet
In the third quarter of 2009, although advertising revenue decreased 9%
partly due to the timing of advertiser spending, we continued to experience
growth in our online audience. Our page views increased, on average,
approximately 73% from the prior year quarter. For the year in total, we expect
continued year-over-year growth in online advertising revenue.
Merchandising Update. In the third quarter, Merchandising segment revenues
decreased due to the prior-year contribution from Sears Canada, a relationship
that expired in the third quarter of 2008, as well as the decline in sales from
Kmart as compared with the prior year quarter. For the fourth quarter of 2009,
we expect to experience significantly lower retail sales from Kmart as compared
with the prior-year periods, as the result of the continued impact of the wind
down of our relationship. We do however expect total Kmart revenues to be up in
the fourth quarter as compared with the prior-year period primarily due to the
recognition of previously deferred royalties as described below and the
recognition of the Kmart minimum guarantee. In addition, we expect Merchandising
segment operating income to benefit in the fourth quarter from a $3.0 million
cash make-whole payment that we received in October 2009 from our crafts
manufacturing partner as the result of capital restructuring within their
business.
Our agreement with Kmart includes royalty payments based on sales, as well as
minimum guarantees. The minimum guarantees have exceeded actual royalties earned
from retail sales from 2003 through 2008 primarily due to store closings and
lower same-store sales trends. The following are the minimum guaranteed royalty
payments (in millions) over the term of the agreement for the respective years
ending on the indicated dates:
1/31/02 1/31/03 1/31/04 1/31/05 1/31/06 1/31/07 1/31/08 1/31/09 1/31/10
Minimum Royalty
Amounts $ 15.3 $ 40.4 $ 47.5 $ 49.0 $ 54.0 $ 59.0 $ 65.0 $ 20.0 $ 14.0 *
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* The minimum guarantee has been reduced by $1.0 million for the contract year ending January 31, 2010 in exchange for relief from exclusivity in certain product categories.
For the contract year ended January 31, 2009, our earned royalty based on actual retail sales at Kmart was $17.9 million. Furthermore, $10.0 million of royalties previously paid have been deferred and were subject to recoupment in the period ending January 31, 2009. No royalties were recouped in 2008 for the contract year ended January 31, 2009. The $10.0 million of deferred royalties remain subject to recoupment for the period ending January 31, 2010. However, given the current trends in our Kmart retail sales, we expect to recognize the previously deferred royalties as non-cash revenue in the fourth quarter of 2009.
Comparison of Three Months Ended September 30, 2009 to Three Months Ended
September 30, 2008
PUBLISHING SEGMENT
(in thousands)
2009 2008 Better /
(unaudited) (unaudited) (Worse)
Publishing Segment Revenues
Advertising $ 15,615 $ 20,419 $ (4,804 )
Circulation 11,027 12,977 (1,950 )
Books 92 878 (786 )
Licensing and other 319 270 49
Total Publishing Segment Revenues 27,053 34,544 (7,491 )
Publishing Segment Operating Costs and Expenses
Production, distribution and editorial 18,091 19,391 1,300
Selling and promotion 9,653 11,225 1,572
General and administrative 1,733 1,747 14
Depreciation and amortization 56 93 37
Total Publishing Segment Operating Costs and Expenses 29,533 32,456 2,923
Operating (Loss) / Income $ (2,480 ) $ 2,088 $ (4,568 )
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Publishing revenues decreased 22% for the three months ended September 30,
2009 from the prior-year period. Advertising revenue decreased $4.8 million due
to the decrease in pages in Martha Stewart Living, Everyday Food and Body +
Soul. The decrease in advertising pages was accompanied by a decrease in
advertising rates at Martha Stewart Living, partially offset by modestly higher
advertising rates at Body + Soul and Everyday Food driven in part by a higher
circulation rate base. Circulation revenue decreased $2.0 million largely due to
higher agency commissions and lower effective subscription rate per copy in the
third quarter of 2009 for Martha Stewart Living, Everyday Food and Body + Soul
as compared with the prior-year period, offset in part by higher subscriber
volume at Everyday Food and Body + Soul. Circulation revenue also decreased as a
result of lower newsstand unit volume of Martha Stewart Living and Everyday
Food. The decline in newsstand revenue from these two magazines was fully offset
by the publication during the third quarter of 2009 of a Halloween special
issue; no special interest publications were included in the prior-year period.
Revenue related to our books business decreased $0.8 million primarily due to
the timing of delivery and acceptance of manuscripts related to our multi-book
agreements with Clarkson Potter/Publishers for Martha Stewart books and Harper
Studios for Emeril Lagasse books.
Magazine Publication Schedule
Three months ended Three Months ended
September 30, 2009 September 30, 2008
Martha Stewart Living Three Issues Three Issues
Everyday Food Two Issues Two Issues
Body + Soul Two Issues Two Issues
Special Interest Publications One Issue No Issues
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Production, distribution and editorial expenses decreased $1.3 million, primarily due to savings related to lower volume of pages and lower paper costs. Additionally, art and editorial story and staff costs decreased partly due to lower headcount. Selling and promotion expenses decreased $1.6 million due to lower marketing program and advertising staff costs, lower circulation marketing costs and lower fulfillment rates associated with Martha Stewart Living. These decreases were partially offset by costs associated with the publication of a Halloween special issue in the third quarter of 2009. General and administrative expenses were essentially flat as compared to the prior-year period primarily due to lower headcount and related costs which were largely offset by higher facilities-related expenses primarily due to reallocating rent charges to reflect current utilization. The increase in our Publishing segment has offsetting decreases in our Merchandising and Corporate segments.
BROADCASTING SEGMENT
(in thousands)
Three Months Ended
September 30,
2009 2008 Better /
(unaudited) (unaudited) (Worse)
Broadcasting Segment Revenues
Advertising $ 4,372 $ 5,959 $ (1,587 )
Radio 1,875 1,875 -
Licensing and other 4,789 6,486 (1,697 )
Total Broadcasting Segment Revenues 11,036 14,320 (3,284 )
Broadcasting Segment Operating Costs and Expenses
Production, distribution and editorial 6,772 8,264 1,492
Selling and promotion 1,031 1,268 237
General and administrative 1,777 1,952 175
Depreciation and amortization 699 290 (409 )
Total Broadcasting Segment Operating Costs and Expenses 10,279 11,774 1,495
Operating Income $ 757 $ 2,546 $ (1,789 )
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Broadcasting revenues decreased 23% for the three months ended September 30,
2009 from the prior-year period. Advertising revenue decreased $1.6 million
primarily due to the decline in household ratings for The Martha Stewart Show as
well as modestly lower rates. Advertising revenues also decreased due to the
timing of advertiser spending for integrations. Licensing and other revenue
decreased $1.7 million primarily due to lower revenue from Emeril Lagasse's
television programming as the result of certain one-time payments in the
prior-year period partially offset by revenue related to the conclusion of our
TurboChef relationship.
Production, distribution and editorial expenses decreased $1.5 million due to
production cost savings related to season 4 of The Martha Stewart Show which
ended in September 2009, as compared to the prior year's season 3, as well as
lower distribution fees. Selling and promotion expenses decreased due to lower
marketing expense for the launch of season 5 as compared to the launch of season
4 in September 2008. Depreciation and amortization increased $0.4 million due to
the amortization of the content library acquired with the Emeril Lagasse
businesses.
INTERNET SEGMENT
(in thousands)
Three Months Ended September 30,
2009 2008 Better /
(unaudited) (unaudited) (Worse)
Internet Segment Revenues
Advertising and Other $ 2,761 $ 3,032 $ (271 )
Total Internet Segment Revenues 2,761 3,032 (271 )
Internet Segment Operating Costs and Expenses
Production, distribution and editorial 2,166 1,910 (256 )
Selling and promotion 1,787 1,487 (300 )
General and administrative 386 711 325
Depreciation and amortization 492 433 (59 )
Total Internet Segment Operating Costs and Expenses 4,831 4,541 (290 )
Operating Loss $ (2,070 ) $ (1,509 ) $ (561 )
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Internet advertising revenues decreased 9% for the three months ended
September 30, 2009 from the prior-year period due to the timing of advertiser
spending and lower advertising rates, despite an increase in page views and sold
advertising volume.
Production, distribution and editorial costs and selling and promotion
expenses both increased $0.3 million due to higher headcount and related costs.
General and administrative expenses decreased $0.3 million due to reduced
headcount in management staffing.
MERCHANDISING SEGMENT
(in thousands)
Three Months Ended
September 30,
2009 2008 Better /
(unaudited) (unaudited) (Worse)
Merchandising Segment Revenues
Kmart earned royalty $ 1,558 $ 3,927 $ (2,369 )
Other 7,373 10,689 (3,316 )
Total Merchandising Segment Revenues 8,931 14,616 (5,685 )
Merchandising Segment Operating Costs and Expenses
Production, distribution and editorial 2,703 2,766 63
Selling and promotion 761 1,214 453
General and administrative 1,929 2,032 103
Depreciation and amortization 14 23 9
Total Merchandising Segment Operating Costs and
Expenses 5,407 6,035 628
Operating Income $ 3,524 $ 8,581 $ (5,057 )
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Merchandising revenues decreased 39% for the three months ended September 30,
2009 from the prior-year period. Actual retail sales of our products at Kmart
declined 60% on a comparable store and 61% on a total store basis mostly due to
the decreased assortment of product categories as we wind down the partnership.
The decrease in other revenues was due to the prior-year revenue true-up from
Sears Canada, a relationship that expired in the third quarter of 2008. Other
revenues were also lower due to a decrease in services that we provide to our
partners for reimbursable zero-margin creative services projects.
Selling and promotion expenses decreased $0.5 million primarily as a result
of the corresponding revenue decrease in services that we provide to our
partners for reimbursable creative services projects. General and administrative
expenses decreased due to lower facilities-related expenses primarily due to
reallocating rent charges to reflect current utilization. The decrease in our
Merchandising segment has offsetting increases in our Publishing segment.
Partially offsetting the decrease in general and administrative expenses are
higher non-cash equity compensation and higher professional fees.
CORPORATE
(in thousands)
Three Months Ended September
30,
2009 2008 Better /
(unaudited) (unaudited) (Worse)
Corporate Operating Costs and Expenses
General and administrative $ 10,577 $ 14,535 $ 3,958
Depreciation and amortization 835 703 (132 )
Total Corporate Operating Costs and Expenses 11,412 15,238 3,826
Operating Loss $ (11,412 ) $ (15,238 ) $ 3,826
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Corporate operating costs and expenses decreased 25% for the three months
ended September 30, 2009 from the prior-year period. General and administrative
expenses decreased largely due to non-recurring charges in the third quarter of
2008 of $3.5 million related to a company-wide reorganization that resulted in
severance and other one-time expenses. General and administrative expenses also
decreased due to lower facilities-related expenses primarily due to reallocating
rent charges to reflect current utilization. The decrease in our Corporate
segment has offsetting increases in our Publishing segment. Expenses also
decreased from lower professional fees and lower travel costs partially offset
by higher compensation costs.
OTHER ITEMS
Interest (expense) / income, net. Interest income, net, was approximately zero
for both quarters ended September 30, 2009 and 2008. Interest income declined
due to a lower average cash balance and lower interest rates on our money market
funds and short-term investments. The decline in interest income was also
accompanied by lower interest expense on our term loan related to the
acquisition of certain assets of Emeril Lagasse.
Income / (loss) on equity securities. There was no income or loss on equity
securities for the quarter ended September 30, 2009 compared to income of
$0.4 million in the prior-year period. The income in the third quarter of 2008
was the result of marking certain assets to fair value in accordance with
accounting principles governing derivative instruments.
Loss in equity interest. The loss in equity interest was $0.3 million for the
quarter ended September 30, 2008. During the second quarter of 2009, certain
investments in equity securities previously accounted for under the equity
method were accounted for under the cost method. Therefore, there was no income
or loss in equity interest in the third quarter of 2009.
Income tax expense. Income tax expense for the three months ended September 30,
2009 was $0.4 million, compared to a $0.3 million expense in the prior-year
period. The increase is due to additional tax liability related to our
indefinite-lived intangibles.
Net (Loss) / Income. Net loss was $12.1 million for the three months ended
September 30, 2009 compared to net loss of $3.7 million for the three months
ended September 30, 2008, as a result of the factors described above.
Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended
September 30, 2008
PUBLISHING SEGMENT
(in thousands)
2009 2008 Better /
(unaudited) (unaudited) (Worse)
Publishing Segment Revenues
Advertising $ 50,652 $ 71,404 $ (20,752 )
Circulation 36,680 46,330 (9,650 )
Books 875 2,895 (2,020 )
Licensing and other 731 973 (242 )
Total Publishing Segment Revenues 88,938 121,602 (32,664 )
Publishing Segment Operating Costs and Expenses
Production, distribution and editorial 53,081 65,573 12,492
Selling and promotion 32,012 39,802 7,790
General and administrative 5,015 5,019 4
Depreciation and amortization 186 286 100
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