-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/RmPejixL83UyU8fWzKnF2WznJBq7r9OB8LeDWDioug7GF7ygbPUjWV1pm82aJt 3ICQeI+J8w7yLpWs85/3WA== 0000950123-00-003056.txt : 20000331 0000950123-00-003056.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950123-00-003056 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 522187059 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15395 FILM NUMBER: 588146 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 MAIL ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 10-K405 1 MARTHA STEWART LIVING OMNIMEDIA, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999 [ ] 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 (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 11 WEST 42ND STREET NEW YORK, NEW YORK 10036 (ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES) (212) 827-8000 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(B) of the Act: (Title of Class) Class A Common Stock, Par Value $0.01 Per Share Securities Registered Pursuant to Section 12(G) of the Act: None 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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K [X]. The Aggregate Market Value of Voting Stock Held by Non-Affiliates of the Registrant as of March 23, 2000: $313,429,958 Number of Shares Outstanding As of March 23, 2000: 15,491,715 shares of Class A Common Stock 34,126,831 shares of Class B Common Stock Documents Incorporated by Reference Portions of the Registrant's Proxy Statement for Its Annual Meeting of Stockholders Presently Scheduled for May 11, 2000 Are Incorporated by Reference into Part III of this Report. ================================================================================ 2 TABLE OF CONTENTS Item 1. Business................................................................................................. 1 Item 2. Properties............................................................................................... 10 Item 3. Legal Proceedings........................................................................................ 10 Item 4. Submission of Matters to a Vote of Security Holders...................................................... 11 Item 5. Markets for Registrant's Common Equity and Related Stockholder Matters................................... 11 Item 6. Selected Financial Data.................................................................................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11 Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................................ 11 Item 8. Financial Statements and Supplementary Data.............................................................. 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................... 12 Item 10. Directors and Executive Officers of the Registrant....................................................... 12 Item 11. Executive Compensation................................................................................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 12 Item 13. Certain Relationships and Related Transactions........................................................... 12 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 12 Signature Page..................................................................................................... 15 Index to Consolidated Financial Statements, Financial Statement Schedules and Other Financial Information...................................................... F-1 Selected Financial Data............................................................................................ F-2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... F-3 Report of Independent Public Accountants........................................................................... F-8 Consolidated Balance Sheets at December 31, 1999 and 1998.......................................................... F-9 Consolidated Income Statements for each of the three years ended December 31, 1999......................................................................... F-14
3 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1999......................................................... F-11 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999................................................................ F-12 Notes to Consolidated Financial Statements......................................................................... F-13 Financial Statement Schedule: II-Valuation and Qualifying Accounts for each of the three years ended December 31, 1999............................................................................ F-25
4 In this Annual Report on Form 10-K, the terms "we," "us," "our," "MSO" and the "Company" refer to Martha Stewart Living Omnimedia, Inc. and, unless the context requires otherwise, Martha Stewart Living Omnimedia LLC("MSLO LLC"), the legal entity that prior to October 22, 1999, operated the businesses we now operate. We have included in this Annual Report certain "forward looking statements" as that term is defined in The Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. These statements can be identified by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "potential" or "continue" or the negative of these terms or other comparable terminology. Our actual results may differ materially from those projected in these statements, and factors that could cause such differences include downturns in national and/or local economies; a softening of the domestic advertising market; increased consolidation among major advertisers or other events depressing the level of advertising spending; changes in consumer reading, purchasing and/or television viewing patterns; unanticipated increases in paper, postage or printing costs; technological developments affecting products or methods of distribution such as the Internet or e-commerce; and changes in government regulations affecting our industries. PART I ITEM 1. BUSINESS OVERVIEW We are an integrated content and commerce company that creates "how-to" content and related merchandise for homemakers and other consumers. Our products bear the well-known "Martha Stewart" brand name, which we leverage across a broad range of media and retail outlets. We primarily focus on the domestic arts, providing consumers with the how-to ideas, information, merchandise and other resources they need to raise the quality of living in and around their homes. The content and merchandise we create span seven core areas: - Home -- decorating, restoring, renovating and collecting items for use and display in the home - Cooking and Entertaining -- cooking, recipes, indoor and outdoor entertaining - Gardening -- gardening, planting, landscape design and maintenance - Crafts -- craft projects and similar family activities - Holidays -- celebrating special occasions through food, gifts, decorating and entertaining ideas - Keeping -- household maintenance, organization and planning, such as homekeeping, petkeeping, recordkeeping and clotheskeeping - Weddings -- all aspects of planning and celebrating a wedding Our company comprises four business segments -- Publishing, Television, Merchandising and Internet/Direct Commerce --through which content and merchandise relating to our seven core content areas are created and distributed to consumers. Many of our creative and business personnel contribute 1 5 across all four segments. This allows us to form creative teams dedicated to a particular content area that can provide their expertise across all our business segments, creating brand consistency and efficiencies of scale as the same research and ideas can be exploited in magazines, television, books, merchandise and on the Internet for only incremental production costs. Additionally, this allows groups like our advertising sales and marketing staff to sell and cross-promote across all our media properties, permitting advertisers to associate with an entire brand rather than a particular product. As of March 23, 2000, we had approximately 430 employees and substantially all of our revenues were derived from operations in the United States. HISTORY Martha Stewart published her first book, Entertaining, in 1982. Over the next eight years she became a well-known authority on the domestic arts, authoring eight more books relating to a variety of our core content areas. In 1991, Time Publishing Ventures, Inc., a subsidiary of Time Inc. ("TPV"), launched Martha Stewart Living magazine with Ms. Stewart serving as its editor-in-chief. In 1993, TPV began producing a Martha Stewart Living weekly television program hosted by Ms. Stewart. In 1995, TPV launched a mail-order catalog, Martha by Mail, which made available products featured in, or developed in connection with, the magazine and television program. In December 1996, Ms. Stewart contributed all her businesses which were not conducted through TPV to MSLO LLC, a newly formed entity, and certain minority investors, including Sharon Patrick, our president and COO, contributed cash to MSLO LLC, each in exchange for MSLO LLC equity. In February 1997, TPV contributed all of its assets primarily relating to its Martha Stewart-related businesses to MSLO LLC in exchange for a $30 million note (the "TPV Note"), a 6.27% equity interest in MSLO LLC, and certain contractual management and other rights incident to that interest (the "TPV Rights"). Additionally, affiliates of TPV entered into various agreements with MSLO LLC pursuant to which such affiliates agreed to perform newsstand distribution services for our magazines, fulfillment services for our magazines and Martha by Mail business, publish certain books containing content originally featured in our magazines, and provide various corporate services to us. DEVELOPMENTS On March 30, 1999, we satisfied all our obligations under the TPV note with cash on hand and borrowings under a term loan. In July 1999, we sold a five percent equity interest in MSO, together with a warrant, to an affiliate of Kleiner Perkins Caufield & Byers ("KPCB") in exchange for $25 million. We used a portion of the proceeds from this transaction to repay our term loan in full. Under the terms of the warrant, KPCB could, upon a payment to us of an additional $21 million, receive 15% of any publicly issued stock that is intended to primarily reflect the performance of our Internet/Direct Commerce segment or 15% of the consideration we receive from a business combination relating to, or a sale of, the businesses comprising our Internet/Direct Commerce segment. On October 22, 1999, MSLO LLC merged into MSO, then a wholly-owned subsidiary of MSLO LLC. In the merger, Ms. Stewart received 34,126,831 shares of our Class B Common Stock, and MSLO LLC's other members received, in the aggregate, 6,176,561 shares of our Class A Common Stock. Each share of Class A Common Stock entitles its holder to one vote and each share of Class B Common Stock entitles its holder to ten votes. Each share of Class B Common Stock is convertible at the owner's option one-for-one into shares of Class A Common Stock. Immediately following the merger, we consummated an initial public offering of 8,280,000 shares of our Class A Common Stock at an offering price of $18 per share, receiving aggregate proceeds, net of underwriting commissions, of $138.6 million. On October 19, 1999, we offered to call TPV's entire equity interest in us pursuant to the terms of MSLO LLC's operating agreement for approximately $42 million. Under the operating agreement, upon our purchase of TPV's interest or TPV's rejection of our offer, the TPV Rights would terminate. On February 18, 2000, we entered into an agreement pursuant to which we agreed to purchase 1,366,000 2 6 shares of our Class A Common Stock from TPV (approximately 52% of TPV's total equity interest in us), for $23.79 per share, or an aggregate $32.5 million. Upon our entering into this agreement, the TPV Rights terminated. As part of this agreement, TPV agreed to extend certain of the agreements we had with TPV's affiliates described above, to continue, subject to certain limited exceptions, to hold shares of our Class A Common Stock until 2003, and to allow us to place advertisements in Time Inc. magazines and websites through 2004 at discounted rates, subject to annual limitations. Our purchase of TPV's 1,366,000 shares of Class A Common Stock is scheduled to occur on March 31, 2000. BUSINESS SEGMENTS Our four business segments are described below. Additional financial information relating to these segments may be found in Note 13 to our Consolidated Financial Statements on page F-21 of this Report. PUBLISHING Our Publishing segment currently consists of two regularly published magazines, Martha Stewart Living and Martha Stewart Weddings, special interest publications, books, and the syndicated askMartha radio program and newspaper column. Magazines We regularly publish two magazines, Martha Stewart Living and Martha Stewart Weddings. Martha Stewart Living appeals primarily to the college-educated woman between the ages of 25 and 54 who owns her principal residence, and Martha Stewart Weddings appeals to a younger but similarly well-educated demographic. We also publish periodic special interest publications. Advertising and circulation revenues represent approximately 60% and 40%, respectively, of our magazine revenues. Martha Stewart Living. Martha Stewart Living, our flagship magazine, is the foundation of our publishing business. Launched in 1991 as a quarterly publication with a circulation of 250,000, we now publish the magazine ten times per year and, since the February 1998 issue, guarantee to advertisers a minimum circulation of 2.1 million. In the event actual circulation for an issue were to fall below the guaranteed circulation, advertisers in that issue would be entitled to a credit for the proportionate share of the circulation shortfall. However, since the launch of the magazine, no shortfall in guaranteed circulation has occurred. Advertising pages, as reported to Publisher's Information Bureau, were 1,557 pages in 1999. Martha Stewart Living seeks to offer its readers reference-quality and original how-to information for the homemaker and other consumers in a unique upscale editorial and aesthetic environment. Martha Stewart Living has won numerous prestigious industry awards. While providing quality editorial content requires significant investment, these costs are supported by premium subscription rates and cover prices for the magazine and premium advertising rates from advertisers that seek association with our brands and the ability to target our audience. The Martha Stewart Living subscriber lists, as well as our catalog and other mailing lists, are important assets, permitting us to target our desired audience with various cross-selling and promotional activities, such as upcoming book releases, new product announcements and promotional appearances by Martha Stewart and our other creative and editorial professionals. Revenues generated by Martha Stewart Living constituted a significant majority of the segment's revenues. Martha Stewart Weddings. We launched Martha Stewart Weddings in 1994 as an annual publication and extended it to a semi-annual publication in 1997. In 1999, Martha Stewart Weddings became a quarterly publication, and had a newsstand distribution of approximately 650,000 per issue. Martha Stewart Weddings targets the upscale bride. Martha Stewart Weddings has the same fundamental 3 7 goal as Martha Stewart Living -- to provide its readers with editorial content of the greatest informational and aesthetic quality. Additionally, Martha Stewart Weddings serves as an important vehicle for introducing young women to our brands. Special Interest Publications. We published our first special interest publication, Clotheskeeping, in 1998, which had a distribution of approximately 750,000. Our 1999 special interest publication, Entertaining, had a distribution of approximately 1 million copies. In March 2000, we published our third special interest publication, Martha Stewart Baby, with a distribution of 1.3 million copies. The purpose of these issues is to provide in-depth advice and ideas around a particular topic contained in our core content areas, allowing us to draw upon our brand name to further promote our expertise in our core content areas. Additionally, we use this format to explore additional content areas, as we did with Martha Stewart Baby. Magazine Production, Distribution and Fulfillment. Commencing with our February 2000 issue of Martha Stewart Living, we print our magazines under long-term printing agreements with R. R. Donnelly. We currently purchase paper through an agreement with Time Inc. The type of paper we use is generally widely available. We use no other significant raw materials in our businesses. Newsstand distribution of the magazines is conducted by an affiliate of TPV under a long-term agreement that expires with the December 2007 issue of Martha Stewart Living, but which we have the right to cancel effective after the December 2001, and December 2004, issues. Our subscription fulfillment services are provided by another affiliate of TPV under a long-term agreement that expires in 2002, and is renewable for two additional three-year periods at our option. Books We create two different types of books: Martha Stewart Living books and Martha Stewart-authored books. We create three Martha Stewart Living books each year. These books consist of a mixture of content previously published in our magazines and original material. The hardcover versions of each of these titles are sold through direct marketing methods to consumers, including Martha Stewart Living readers and regular craft and cookbook buyers, and paperback editions are sold at retail book stores. We also produce Good Things, which is a continuity program of periodic card mailings of individual crafts and homekeeping ideas that our subscribers compile in loose-leaf binders. The publication of these books and the continuity cards is done by Oxmoor House, Inc., an affiliate of TPV, which also handles their distribution through direct marketing and some retail channels. The Martha Stewart Living books also are distributed through other retail channels by Clarkson N. Potter, a division of Random House, a subsidiary of Bertelsmann AG, under various agreements. Under an agreement with Clarkson N. Potter, we have created one completely original Martha Stewart-authored book approximately every other year and are obligated to write one more such book. Most recently, we released Martha Stewart's Healthy Quick Cook in 1997 and Martha Stewart's Hors d'Oeuvres Handbook, which was co-authored by our Cooking and Entertaining Editor, Susan Spungen, in 1999. These books are generally sold by Clarkson N. Potter through retail distribution channels. Our current book library comprises 31 titles. Of these books, 17 are Martha Stewart Living books, and 14 are Martha Stewart-authored books. We own the copyrights to all these books. The askMartha Newspaper Column and Radio Program Newspaper Column. Our newspaper presence began in 1995 with askMartha, a weekly syndicated newspaper column that answers specific questions relating to our core content areas. The askMartha column is syndicated through The New York Times Syndication Sales Corporation. Originally appearing in 57 U.S. newspapers, the column now appears weekly in approximately 225 U.S. and Canadian newspapers. The column generally appears as a one-quarter to one-half page layout that 4 8 includes at least one high-quality photograph and provides a complementary forum to our longer magazine pieces and television segments. While the revenues generated by the askMartha column are small, the newspapers carrying the column reach approximately 40 million readers each week, and the column generally includes a reference to our internet site or to our products or other publications, promoting product and brand awareness. We launched a companion column, askMartha Weddings, in the summer of 1999, which appears in the wedding announcement section of newspapers. Radio Program. In partnership with Westwood One Radio, Inc., we launched the askMartha program of radio vignettes in September 1997. Each 90-second-long vignette, which is currently narrated by Martha Stewart, is accompanied by a 60-second commercial or two 30-second commercials that we jointly sell with Westwood One. These vignettes air five days a week, primarily between the hours of 6 a.m. and 12 p.m., and follow a format similar to the newspaper column, providing an answer to a specific question. Currently, the askMartha program airs on approximately 285 radio stations across the United States. These stations cover approximately 93% of the total U.S. market. The mix of stations on which the askMartha program appears generally is intended to reach as many consumers in our target demographic as possible. In view of the variety of radio stations airing these vignettes, however, we believe we reach a much broader demographic with the askMartha program than with many of our other omnimedia outlets, leading to significant no-cost brand promotion outside our core audience. Competition Publishing is a highly competitive business. Our magazines, books and related publishing products compete with other mass media and many other types of leisure-time activities. Overall competitive factors in this segment include price, editorial content and editorial and aesthetic quality. Competition for advertising dollars in magazine operations is primarily based on advertising rates, editorial and aesthetic quality, the desirability of the magazine's demographic, reader response to advertisers' products and services and effectiveness of the advertising sales staff. Martha Stewart Living competes for advertising dollars in the women's service magazine category, including Ladies' Home Journal, McCall's and Redbook. Martha Stewart Living competes for readers and advertising with decorating, cooking and lifestyle magazines, such as Architectural Digest, Metropolitan Home, Bon Appetit, Food & Wine, Gourmet, Country Living, Better Homes & Gardens, Southern Living, and others. Martha Stewart Weddings competes for readers and advertising dollars primarily in the wedding service magazine category, which includes Bride's Magazine, Modern Bride, Bridal Guide and Elegant Bride. Seasonality Martha Stewart Living magazine is published ten times annually: three issues in each of the first and second quarters and two issues in each of the third and fourth quarters. Martha Stewart Weddings is published four times annually: one issue in each of the second and third quarters and two issues in the fourth quarter. In addition, the number of advertising pages per issue tends to be higher in issues published in the fourth quarter. We also publish special interest issues periodically, and the timing of such publications can lead to quarterly fluctuations in the segment's results. TELEVISION Our television business segment currently produces Martha Stewart Living, a nationally syndicated, daily, one-hour program with a half-hour weekend "best of the week" version, from Martha's Kitchen, a daily half-hour program on cable's Food Network, weekly spots on CBS' The Early Show, and periodic prime-time specials. 5 9 Martha Stewart Living The Martha Stewart Living program is the cornerstone of our television business segment and generally seeks to demonstrate our how-to ideas and to motivate viewers to pursue those ideas in their own lives. The program is a syndicated daytime program hosted by Martha Stewart consisting of several segments, each of which ties into one of our seven core content areas. Originally launched as a half-hour weekend program in 1993, the program was expanded to also include a daily half-hour program in 1997 and, in a majority of markets, a one-hour weekday program in 1999. King World syndicates the program domestically under a distribution agreement that expires after the 2002-03 broadcast season. Your Channel Television, Inc. distributes the program in Canada over its Life Network cable network. The program can currently be seen by 86% of all U.S. television households. The average U.S. rating of the weekday program during calendar year 1999 was 1.76. Under the terms of our agreement with King World, we develop, produce and retain all copyrights in the programs. We are compensated partially in cash and partially in airtime. We then sell that airtime to advertisers, subject to a distribution fee payable to King World. The airtime we receive from the King World agreement provides us with a substantial degree of control over our advertising base and allows us to include television advertising in multimedia sales packages offered to advertisers. Our Life Network agreement in Canada compensates us with a license fee. We produce Martha Stewart Living primarily at our state-of-the-art studio facility in Westport, Connecticut, and segments are filmed both in the studio and at various other locations. The Early Show Martha Stewart is a regular lifestyle correspondent for, and generally appears each Tuesday on, CBS' The Early Show. In exchange for this appearance, we receive airtime in the form of one 30-second spot adjacent to the segment. Our advertising sales staff sells this advertising time. from Martha's Kitchen In September 1999, the Food Network cable channel began airing a half-hour Martha Stewart branded program twice a day (generally in the evenings and late at night), seven days a week, entitled from Martha's Kitchen. This program consists primarily of food-related segments repackaged from previous Martha Stewart Living programs. In exchange for the programming, we receive airtime during the early showing and some late night showings, which is sold by our advertising sales staff. We also receive a percentage of the revenue from advertising aired during the late night showing that is not sold by us. Prime Time Specials Periodically, we produce prime time holiday specials. Home for the Holidays, our 1999 Christmas special, was watched by over 7.5 million U.S. households. Typically, we purchase the relevant airtime from a television network and then our advertising sales staff sells the advertising to air during the special. Competition Series television is a highly competitive business. Our television programs compete directly for viewers and advertising dollars with other how-to television programs, as well as with general programming on other channels. Overall competitive factors in this segment include programming content, quality and distribution and demographics of the programming. Similar to publishing, competition for advertising dollars is primarily based on advertising rates, the demographics of the 6 10 audience, viewer response to advertisers' products and services and effectiveness of the advertising sales staff. Seasonality Revenue and operating results from our Television segment tend to be higher in the fourth quarter due to generally higher ratings. Additionally, our prime-time television specials have historically been broadcast in the fourth quarter. MERCHANDISING Our merchandising segment designs merchandise (and related packaging and advertising materials) that is then manufactured and distributed through traditional "bricks and mortar" retail channels by third parties under Martha Stewart brands. In exchange for our design services and the use of our trademarks, we are paid royalties by our merchandising partners. In addition, we are typically reimbursed for our design and other related expenses. Third parties with whom we have direct merchandising relationships include Kmart Corporation, The Sherwin-Williams Company, The Hudson's Bay Company, and P/Kaufmann, Inc. In addition, our merchandise is sold at stores such as Sears, Calico Corners, Jo-Ann Fabrics and Crafts, Janovic Plaza, Canadian Tire and various other specialty stores. Our merchandising strategy is to offer top-quality merchandise in our core content areas at a wide variety of price points and distribution channels, from mass market discounters and national department store chains to specialty retailers. In 1999, our revenues from Kmart constituted the substantial majority of our revenues from this segment. Martha Stewart Everyday Collections. The Martha Stewart Everyday collections currently include Martha Stewart Everyday Home, Martha Stewart Everyday Garden, Martha Stewart Everyday Baby baby and Martha Stewart Everyday Colors. Products sold in connection with these trademarks (other than Martha Stewart Everyday Colors) are sold at over 2,100 Kmart stores in the United States and over 300 Zellers stores in Canada. Martha Stewart Everyday Colors products are sold in the United States at 2,100 Kmart stores and over 800 Sears stores, as well as over 300 Canadian Tire Stores in Canada. Each Martha Stewart Everyday collection, other than the Martha Stewart Everyday Colors collection that is under contract with Sherwin-Williams, is governed by agreements with Kmart and Zellers. Each of these agreements provides that we design (or, for seeds and live plants, select) all products, packaging, signage and associated collateral materials. We retain all rights in the merchandise designs other than the distribution rights licensed to Kmart and Zellers, which are exclusive in the United States and Canada at the mass market discount channel of retail distribution. We are assured sufficient in-store presence and volume to establish and protect our brands through guaranteed minimum royalties and through dedicated "store-within-a-store" selling formats. Martha Stewart Everyday Home products occupy approximately 60% of the merchandise display space in a typical Kmart home fashion department. Martha Stewart Everyday Home. The Martha Stewart Everyday Home collection is a line of sheets, towels, bath accessories, window treatments and kitchen textiles designed by us and manufactured by a variety of vendors, including Springs Industries, Inc., Westpoint Stevens Inc., and Pillowtex Corporation. The collection currently consists of approximately 2400 SKUs and 27 product lines. This agreement expires in February 2003. 7 11 Martha Stewart Everyday Garden. The Martha Stewart Everyday Garden program is a line of outdoor furniture, garden tools, fertilizers, planting pots, bulbs, seeds and live plants. Through the live plants program, we are bringing plants to the mass market discount channel that have previously only been available in limited quantities and at higher prices at specialty garden centers. The Kmart garden agreement expires in October 2003 with a three-year renewal at Kmart's option. Martha Stewart Everyday Baby baby. Commencing in fall 1999, we launched the Martha Stewart Everyday Baby baby collection of nursery basics at Kmart. This agreement expires in February 2003. Martha Stewart Everyday Colors. Martha Stewart Everyday Colors is a line of interior latex paints introduced in 1997. The colors are developed by us and the paints are manufactured and distributed by Sherwin-Williams. The Martha Stewart Everyday Colors line consists of 256 colors and 69 SKUs. Our agreement with Sherwin-Williams expires in December 2000. Martha Stewart Everyday Housewares. In September 2000, we are scheduled to launch the Martha Stewart Everyday Housewares collection at Kmart, which will consist of dinnerware, flatware, beverage ware, cookware, bakeware, mirrors, picture frames, lamps and organizational products relating to our core content area of keeping, all designed to reflect the Martha Stewart aesthetic. Other Brands Martha Stewart Home Collection. The Martha Stewart Home collection consists of decorative fabrics that we design and license to P/Kaufmann for manufacture and distribution to retailers. Under our agreement with P/Kaufmann, which runs through December 2003, we receive guaranteed minimum royalties and reimbursement of certain costs. In September 1999, the Martha Stewart Home collection began selling in specialty stores, including in over 1,100 Calico Corners and Jo-Ann Fabrics and Crafts stores. As in our agreements with Kmart, we retain creative control over, and intellectual property rights in, the merchandise included in the Martha Stewart Home collection. Martha's Fine Paints Collection. The Martha's Fine Paints collections are our oldest merchandise lines, dating back to 1995. These collections include approximately 80 colors of interior oil and acrylic paint sold through specialty paint dealers, such as Janovic Plaza. Competition The retail merchandising business is highly competitive. Our principal competitors are the competitors of the retail stores in which our products are sold. These include Target stores, Wal-Mart Stores, Inc., The Home Depot, Inc. and other mass market discount stores, and competitive factors include numbers and locations of stores, brand awareness and price. Seasonality Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches. Additionally, we receive revenues from the Martha Stewart Everyday Garden line primarily in the first and second quarters of each year. INTERNET/DIRECT COMMERCE Our Internet/Direct Commerce segment currently consists of our Martha by Mail catalog business and the operation of our website, marthastewart.com. The Martha by Mail catalog debuted as an insert in Martha Stewart Living magazine in 1995 and was originally created to provide our consumers the materials necessary to pursue the how-to projects presented in our various media. From those beginnings, it has evolved into our upscale, direct-to-consumer merchandising business that also includes finished 8 12 products such as outdoor furniture, laundry appliances, bedding and other home furnishings. Unlike our retail merchandising business, which exclusively consists of products we design, we include in Martha by Mail other selected products consistent with our brand image and how-to philosophy that typically are not offered through any national retail stores. In 1999, we distributed 11 editions and 15 million copies of our catalogs. Our catalog mailing list includes customers identified through our media activities, such as current and past subscribers, gift subscription recipients, continuity card program subscribers and our website registrants, as well as third-party customer lists. Our website, marthastewart.com, currently consists of seven linked content channels, each dedicated to one of our core areas, as well as our online store. Our content channels include recipes featured on our television programs, an interactive question and answer service, community bulletin boards and chats, and information and photographs repurposed from our books and magazines. Our advertising sales force sells advertisements for our website individually and as part of multi-media packages. Our online store currently offers more than 1200 Martha by Mail products compared with approximately 400 offerings in any given catalog. These include our marthasflowers offerings of growers bunches of flowers and seasonal greens, introduced in October, 1999. In an effort to evolve Martha by Mail from offline direct commerce to e-commerce, we have recently begun providing discounts and incentives to our consumers who purchase products over the Internet. Our Internet/Direct Commerce business has grown significantly during 1999 and we have made significant personnel and technology investments to prepare for continued growth. As of December 1999, we had over 1,000,000 registered users of our website. We source and purchase all our Martha by Mail product and manage our merchandise inventory. Currently, our Martha by Mail fulfillment is conducted by Time Customer Service, an affiliate of TPV, pursuant to an agreement that is terminable by either party on 360 days notice. We believe that this arrangement is adequate to address our current needs, and are taking appropriate steps to prepare for continued growth in this area. In December, 1999, we entered into an agreement with BlueLight.com, L.L.C., a newly-formed e-commerce company, pursuant to which our Martha Stewart Everyday line of products will be available for sale on marthastewart.com and on BlueLight.com. We expect Martha Stewart Everyday products to be available for sale on these sites in the fall of 2000. Competition Competitors of our Internet/Direct Commerce segment include Pottery Barn (and other catalogs owned by Williams Sonoma, Inc.), Plow & Hearth, Chef's Catalog, Eddie Bauer Home, Garnet Hill Company, Crate and Barrel, garden.com, homearts.com, women.com, ivillage.com and many others. We compete on the basis of our content, the quality, uniqueness, price and assortment of our merchandise, brand name, service to customers and proprietary customer lists. Seasonality Internet/Direct Commerce segment revenues tend to be higher in the fourth quarter due to increased consumer and advertiser spending during the holiday period. INTELLECTUAL PROPERTY The principal trademarks we use to distinguish our brands are Martha Stewart Living, Martha Stewart Everyday, Martha Stewart Home, Martha Stewart Weddings, askMartha, Martha by Mail, marthastewart.com and marthasflowers. These trademarks are the subject of registrations and pending applications, both domestic and international, filed by us for use with a variety of products and other content, and we continue to expand our worldwide usage and registration of related trademarks. We file 9 13 copyrights regarding our proprietary designs and editorial content on a regular basis. We regard our rights in and to our trademarks and materials as valuable assets in the marketing of our products and vigorously seek to protect them against infringement or denigration by third parties. We own the rights to many of these marks pursuant to an agreement between us and Ms. Stewart, which is described under Item 13 of this Report. ITEM 2. PROPERTIES Information concerning the location, use and approximate square footage of our principal facilities, all of which are leased, is set forth below:
APPROXIMATE AREA LOCATION USE IN SQUARE FEET -------- --- ---------------- 11 West 42nd Street, Principal executive and 111,840 New York, New York administrative offices; design facilities; and sales offices 19 Newtown Turnpike, Executive and 30,523 Westport, Connecticut administrative offices for television, including the television studio facilities; and sales offices for television 601 West 26th Street, Internet development 150,000 New York, New York studio, photography studio, test kitchens, and prop storage
The leases for these offices and facilities expire between August 2000 and November 2010, and some of these leases are subject to our renewal. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. Currently, the 601 West 26th Street facility is under construction, and we expect to begin to occupy the facility in late 2000. We also lease the right to use various properties owned by Martha Stewart for our editorial, creative and product development processes. These "living laboratories" allow us to experiment with new designs and new products, such as garden layouts, and help generate ideas for new content available to all of our media outlets. The terms of this location rental agreement are described in Item 13 of this Report. We believe that our existing facilities are well maintained and in good operating condition. ITEM 3. LEGAL PROCEEDINGS We are, from time to time, involved in various legal proceedings in the ordinary course of our business. We believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will not have a material adverse effect on our business, financial condition or results of operations. In addition, Martha Stewart from time to time is the subject of legal actions relating to or that could otherwise affect our business, which actions we intend, when appropriate, to vigorously defend in 10 14 cooperation with Ms. Stewart. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 11, 1999, MSLO LLC, then our sole stockholder, and all the members of MSLO LLC, approved by unanimous written consent the adoption of the merger of MSLO LLC into us, as well as the merger agreement pursuant to which the merger was consummated. PART II ITEM 5. MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Securities Matters Our Class A Common Stock is listed and traded on The New York Stock Exchange. Our Class B Common Stock is not listed or traded on any exchange, but is convertible into Class A Common Stock at the option of its owner on a one-for-one basis. From October 19, 1999 (the date on which our Class A Common Stock began trading on The New York Stock Exchange) through December 31, 1999, the highest sale price of our Class A Common Stock was $47.50 per share, and the lowest sale price was $20.12 per share. As of March 23, 2000, there were 3,313 record holders of our Class A Common Stock and one record holder of our Class B Common Stock. We have not paid any dividends on our common stock. We have no intentions of paying dividends on our common stock in the near future. Use of Proceeds Our first registration statement on Form S-1 (File No. 333-84001) under the Securities Act of 1933 was declared effective by the Securities and Exchange Commission on October 18, 1999. Since the completion of the offering, we have used approximately $13.3 million of the proceeds in connection with the purchase of an equity interest in BlueLight.com, L.L.C. Additionally, we have entered into an agreement with TPV, pursuant to which we will use approximately $32.5 million of the offering proceeds to repurchase 1,366,000 shares of our Class A Common Stock from TPV. We intend to apply the balance of the proceeds from our public offering to working capital, which, when not being utilized, is invested in government securities and other short-term, investment-grade, interest bearing instruments. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth on page F-2 of this Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is set forth on pages F-3 through F-7 of this Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK None 11 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth on pages F-8 through F-24 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is set forth in our Proxy Statement for our annual meeting of stockholders scheduled to be held on May 11, 2000 (our "Proxy Statement") under the captions "ELECTION OF DIRECTORS - Information Concerning Nominees," "INFORMATION CONCERNING EXECUTIVE OFFICERS," and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and is hereby incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth in our Proxy Statement under the captions "COMPENSATION OF OUTSIDE DIRECTORS," "EXECUTIVE COMPENSATION" and "EMPLOYMENT ARRANGEMENTS" and is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth in our Proxy Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth in our Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS" and is hereby incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. See page F-1 of this Report. 2. See page F-1 of this Report. 3.
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 2.1 -- Agreement and Plan of Merger.* 2.2 -- LLC Membership Interest Purchase Agreement, dated as of July 27, 1999, by and among Martha Stewart Living Omnimedia LLC, KPCB Holdings, Inc., as nominee, and KPCB IX Associates,
12 16 LLC.* 3.1 -- Registrant's Certificate of Incorporation.* 3.2 -- Registrant's By-Laws.* 4.1 -- Form of Specimen Certificate for Registrant's Common Stock.* 4.2 -- Loan Agreement (line of credit) between NationsBank, N.A. and Martha Stewart Living Omnimedia LLC, dated as of February 3, 1997.* 4.3 -- Amendment No. 1, dated as of June 30, 1998, to the Loan Agreement, dated as of February 3, 1997, between Martha Stewart Living Omnimedia LLC and NationsBank, N.A.* 4.4 -- Amendment No. 2, dated as of March 30, 1999, to the Loan Agreement, dated as of February 3, 1997, between Martha Stewart Living Omnimedia LLC and NationsBank, N.A.* 4.5 -- Warrant for a Percentage of the Internet Business of Martha Stewart Living Omnimedia LLC, dated July 27, 1999, issued to KPCB Holdings, Inc.* 10.1 -- Form of Stockholders' Agreement.* 10.2 -- 1999 Stock Incentive Plan.*+ 10.2.1 -- Amendment Number 1 to 1999 Stock Incentive Plan, dated as of March 9, 2000+ 10.3 -- 1999 Non-Employee Director Stock and Option Compensation Plan.*+ 10.4 -- 1999 Employee Stock Purchase Plan.*+ 10.5 -- Martha Stewart Living Omnimedia LLC Phantom Performance Unit Plan.*+ 10.6 -- Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan.*+ 10.7 -- Form of Employment Agreement, by and between Registrant and Martha Stewart.*+ 10.8 -- Form of Intellectual Property License and Preservation Agreement, by and between Registrant and Martha Stewart.* 10.9 -- Form of Location Rental Agreement, by and between Registrant and Martha Stewart.* 10.10 -- Lease, dated as of September 24, 1992, between Tishman Speyer Silverstein Partnership and Time Publishing Ventures, Inc., as amended by First Amendment of Lease dated as of September 24, 1994 between 11 West 42 Limited Partnership and Time Publishing Ventures, Inc.* 10.11 -- Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.12 -- Lease, dated August, 1999, between 601 West Associates LLC
13 17 and Martha Stewart Living Omnimedia LLC.* 10.12.1 -- First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc. 10.13 -- Lease, dated as of March 6, 1996, between Newtown Group Properties Limited Partnership and Time Publishing Ventures, Inc., with amendments.* 10.14 -- Lease, dated as of August 1, 1996, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.15 -- Lease, dated as of August 14, 1997, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.16 -- License Agreement, dated January 28, 1997, by and between Martha Stewart Living Omnimedia LLC and Kmart Corporation.* 10.17 -- Severance Agreement, dated September 23, 1999, by and between Martha Stewart Living Omnimedia LLC and Sharon Patrick.*+ 10.18 -- Letter Agreement, dated September 3, 1999, by and between Martha Stewart Living Omnimedia LLC and Helen Murphy.*+ 10.19 -- LLC Unit Option Agreement, dated September 3, 1999, by and between Martha Stewart Living Omnimedia LLC and Helen Murphy.*+ 27.1 -- Financial Data Schedule.
* Incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001 + Indicates management contracts and compensatory plans (b) None. 14 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARTHA STEWART LIVING OMNIMEDIA, INC. By: /s/ Martha Stewart ------------------------------------- Name: Martha Stewart Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE --------- ----- /s/ Martha Stewart Chairman of the Board and Chief ---------------------- Executive Officer Martha Stewart (Principal Executive Officer) /s/ Sharon Patrick President, Chief Operating Officer ---------------------- and Director Sharon Patrick /s/ Helen Murphy Chief Financial and Administrative ---------------------- Officer Helen Murphy (Principal Financial Officer) /s/ James Follo Senior Vice President, Finance and ---------------------- Controller James Follo (Principal Accounting Officer) /s/ Charlotte Beers Director ---------------------- Charlotte Beers Director ---------------------- L. John Doerr /s/ Naomi O. Seligman Director ---------------------- Naomi O. Seligman Each of the above signatures is affixed as of March 29, 2000. 15 19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND OTHER FINANCIAL INFORMATION Selected Financial Data F-2 Management's Discussion and Analysis of Financial Condition and Results of Operations F-3 Consolidated Financial Statements: Report of Independent Public Accountants F-8 Consolidated Balance Sheets at December 31, 1999 and 1998 F-9 Consolidated Income Statements for each of the three years ended December 31, 1999 F-10 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1999 F-11 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999 F-12 Notes to Consolidated Financial Statements F-13 Financial Statement Schedule: II- Valuation and Qualifying Accounts for each of the three years ended December 31, 1999 F-25
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. F-1 20 SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT SHARE DATA)
1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- INCOME STATEMENT DATA REVENUES Publishing $ 3,647 $ 3,899 $108,694 $127,020 $145,520 Television -- -- 12,396 23,351 30,590 Merchandising -- -- 6,919 15,004 20,200 Internet/Direct Commerce -- -- 4,812 14,673 36,004 -------- -------- -------- -------- -------- TOTAL REVENUES 3,647 3,899 132,821 180,048 232,314 -------- -------- -------- -------- -------- Income from operations 3,516 3,800 16,591 27,385 22,322 -------- -------- -------- -------- -------- Net income 3,318 3,635 13,929 23,806 25,569 -------- -------- -------- -------- -------- Pro forma net income(1) 1,917 2,072 6,891 12,989 11,692 -------- -------- -------- -------- -------- EBITDA(2) 3,516 3,800 20,518 32,919 28,882 -------- -------- -------- -------- -------- EBITDA before Internet/Direct Commerce(3) $ 3,516 $ 3,800 $ 21,741 $ 37,917 $ 43,649 -------- -------- -------- -------- -------- PER SHARE DATA Pro forma(1) Earnings per share-basic and diluted $ .05 $ .05 $ .18 $ .33 $ .28 Weighted average common shares outstanding 39,176 39,176 39,176 39,176 41,720 Adjusted Pro forma(4) Earnings per share-basic and diluted $ .04 $ .04 $ .14 $ .26 $ .24 Weighted average common shares outstanding 49,583 49,583 49,583 49,583 49,588 FINANCIAL POSITION Cash and cash equivalents $ 7 $ 85 $ 9,971 $ 24,578 $154,749 Total assets 2,786 4,074 105,706 125,372 281,771 Long term debt -- -- 30,000 27,650 -- Shareholders' equity (436) 589 13,235 36,815 199,402
(1) Pro forma net income reflects the income taxes that would have been recorded had the Company been a "C" Corporation for all periods presented. (2) EBITDA is earnings before interest, taxes, depreciation and amortization. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. (3) EBITDA before Internet/Direct Commerce represents EBITDA of the Company, excluding the operations of the Internet/Direct Commerce business segment. (4) Adjusted pro forma earnings per share amounts are calculated based upon the number of common shares outstanding as if all common shares issued in connection with the Kleiner Perkins investment, and the initial public offering were outstanding for all periods presented in order to better reflect comparability between periods. Proceeds received from these transactions have not been included in the calculation of earnings per share. F-2 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998 REVENUES Total revenues increased $52.3 million, or 29%, to $232.3 million for the year ended December 31, 1999, from $180.0 million for the year ended December 31, 1998. Publishing revenues increased $18.5 million, or 15%, to $145.5 million for the year ended December 31, 1999, from $127.0 million for the year ended December 31, 1998. This increase reflects an increase in advertising revenues of $14.4 million, primarily due to an increase in advertising pages sold in Martha Stewart Living magazine and the increased frequency of Martha Stewart Weddings magazine, which published four times in 1999, compared to two times in 1998. Circulation revenues increased $4.1 million due to higher subscription revenues from Martha Stewart Living magazine as a result of higher net revenue per copy sold, resulting primarily from lower agent orders in 1999. Circulation revenues also increased due to the increased frequency of Martha Stewart Weddings magazine. Television revenues increased $7.2 million, or 31%, to $30.6 million for the year ended December 31, 1999 from $23.4 million for the year ended December 31, 1998. The increase is due primarily to $7.0 million of revenues associated with the addition of a second half hour to our syndicated daily program, $3.6 million revenues received from our prime-time holiday special "Martha Stewart Home for the Holidays" partially offset by reduced advertising revenues resulting from lower ratings for the year ended December 31, 1999. Merchandising revenues increased $5.2 million, or 35%, to $20.2 million, for the year ended December 31, 1999, from $15.0 million for the year ended December 31, 1998, due primarily to revenues received from the addition of our Martha Stewart Everyday line of garden products, launched in the first quarter of 1999, and also from Martha Stewart Home decorative fabrics and Martha Stewart Everyday Baby baby products, both launched in the third quarter of 1999. Internet/Direct Commerce revenues increased $21.3 million, or 145%, to $36.0 million for the year ended December 31, 1999, from $14.7 million for the year ended December 31, 1998, due to higher merchandise sales of $18.4 million resulting from higher catalog circulation and increased Internet traffic. PRODUCTION, DISTRIBUTION AND EDITORIAL Production, distribution and editorial expenses increased $43.1 million, or 52%, to $126.0 million for the year ended December 31, 1999, from $82.9 million for the year ended December 31, 1998. Internet/Direct Commerce costs increased $27.8 million due to increased fulfillment costs and cost of goods sold, each as a result of higher revenues, as well as increased catalog production and distribution costs resulting from higher catalog circulation. In addition, costs increased $6.6 million due to increased investment in developing and maintaining our Internet site. Publishing segment costs increased $9.7 million, reflecting increased costs for Martha Stewart Living magazine due to an increase in the number of pages printed per issue as a result of higher advertising pages sold and higher printing costs. Furthermore, we published an additional two issues of Martha Stewart Weddings magazine in 1999. Television costs increased $5.6 million, primarily as a result of higher production and distribution costs incurred for the additional half-hour of programming in 1999. SELLING AND PROMOTION Selling and promotion expenses increased $4.9 million, or 14%, to $39.4 million for the year ended December 31, 1999, from $34.5 million for the year ended December 31, 1998. Publishing segment costs increased $2.6 million, resulting from increased circulation and advertising sales costs incurred to support higher publishing revenues. Internet/Direct Commerce segment costs increased $2.3 million primarily due to increased media spending promoting our Internet site. GENERAL AND ADMINISTRATIVE General and administrative expenses, consisting primarily of costs relating to executive, finance, professional services, information technology, office services, including rent, and human resources, increased $8.2 million, or 28%, to $37.9 million for the year ended December 31, 1999, from $29.7 million for the year ended December 31, F-3 22 1998. We have incurred higher costs as a result of continued infrastructure development to support higher levels of revenues, including higher information technology, finance, occupancy and professional fees in 1999. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $1.1 million, or 20%, to $6.6 million for the year ended December 31, 1999, from $5.5 million for the year ended December 31, 1998. The increase is attributable to higher levels of property and equipment, including $5.0 million of equipment leases that were refinanced into capital leases in 1999. INTEREST INCOME (EXPENSE), NET Interest income was $0.5 million for the year ended December 31, 1999, compared to interest expense of $2.2 million for the year ended December 31, 1998. Net interest income resulted in 1999 from repayment of all outstanding long term debt, as well as interest income earned on the invested proceeds received from our initial public offering in October 1999. INCOME TAX PROVISION (BENEFIT) The provision for income taxes reflects a net income tax benefit of $2.7 million for the year ended December 31, 1999. The net income tax benefit in 1999 resulted primarily from the conversion to a "C" corporation as a result of our merger with Martha Stewart Living Omnimedia LLC in October 1999. Accordingly, we recognized a deferred tax benefit of $4.8 million in 1999. Prior to the merger, we operated as a limited liability company. Income tax expense was $1.3 million in 1998, representing primarily unincorporated business and foreign income taxes. NET INCOME Net income increased $1.8 million, or 8%, to $25.6 million for the year ended December 31, 1999, from $23.8 million for the year ended December 31, 1998, primarily as a result of the above mentioned factors. F-4 23 COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997 REVENUES Total revenues increased $47.2 million, or 36%, to $180.0 million for the year ended December 31, 1998, from $132.8 million for the year ended December 31,1997. Publishing segment revenues increased $18.3 million, or 17%, to $127.0 million for the year ended December 31, 1998, from $108.7 million for the year ended December 31, 1997. This increase primarily reflects higher advertising revenues of $14.9 million due to an increase in advertising pages sold in Martha Stewart Living magazine of 17% and an increase in per page advertising rates of 5%, as well as additional advertising revenues of $1.6 million received from a special issue published in the fourth quarter of 1998. Circulation revenues increased $4.4 million as a result of generally higher newsstand revenues, including newsstand revenues recognized on the special issue. Television revenues increased $11.0 million, or 88%, to $23.4 million for the year ended December 31, 1998, from $12.4 million for the year ended December 31, 1997, due primarily to producing and airing a full year of the daily syndicated show in both the United States and Canada, as opposed to a partial year in 1997, and revenues of $1.9 million earned from licensing a second half hour of "best of" show during the fourth quarter of 1998. These increases were partially offset by the elimination of revenues of $0.8 million derived from an agreement under which reruns of Martha Stewart Living programming were aired on the Lifetime cable network. In light of Martha Stewart Living programming moving to a daily format, we elected not to attempt to renew this agreement, which expired during the third quarter of 1997. Merchandising revenues increased $8.1 million, or 117%, to $15.0 million for the year ended December 31, 1998, from $6.9 million for the year ended December 31, 1997. This increase resulted from an increase in revenues of $4.7 million, resulting from a greater assortment of Martha Stewart Everyday bed and bath products in 1998 and the introduction of these products at Zellers in Canada in December 1998, which contributed $1.3 million to revenues in 1998. Internet/Direct Commerce revenues increased $9.9 million, or 205%, to $14.7 million for the year ended December 31, 1998, from $4.8 million for the year ended December 31, 1997. The increase is primarily due to an increase in catalog merchandise sales resulting from an increase in both the number of products offered through the catalog and the number of catalogs mailed, in addition to increased sales on our website. Internet advertising revenues increased $1.1 million, primarily due to our website's first full year of operation in 1998, compared with only four months in 1997. PRODUCTION, DISTRIBUTION AND EDITORIAL Production, distribution and editorial expenses increased $23.8 million, or 40%, to $82.9 million in the year ended December 31, 1998, from $59.1 million in the year ended December 31, 1997. Publishing segment costs increased $7.3 million, as a result of an increased number of pages printed per issue of 17% resulting from the increase in advertising pages sold, costs associated with the special issue and higher printing costs. Television costs increased $4.1 million due to higher production and distribution costs associated with producing and airing a full year of the daily syndicated show. Internet/Direct Commerce costs increased $12.4 million, due to an increase of $3.9 million in catalog production and distribution costs resulting from higher catalog circulation. In addition, fulfillment costs increased $2.3 million and cost of goods sold increased $4.7 million, each as a result of higher revenues. SELLING AND PROMOTION Selling and promotion expenses increased $2.6 million, or 8%, to $34.5 million for the year ended December 31, 1998 from $32.0 million for the year ended December 31, 1997. This increase primarily reflects increased Publishing segment costs of $1.3 million resulting from increased circulation costs and increased Television segment expenses of $0.9 million associated with the expanded programming schedule. GENERAL AND ADMINISTRATIVE General and administrative expenses increased $8.5 million, or 40%, to $29.7 million for the year ended December 31, 1998 from $21.2 million for the year ended December 31, 1997. The increase is attributable to higher executive compensation, higher costs associated with increased revenues, the buildup of corporate infrastructure in the business and higher staffing levels throughout the Company. F-5 24 DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $1.6 million, or 41%, to $5.5 million for the year ended December 31, 1998, from $3.9 million for the year ended December 31, 1997, as a result of higher levels of property, plant and equipment in service. INTEREST INCOME (EXPENSE), NET Interest expense, net, remained unchanged at $2.2 million. NET INCOME Net income increased $9.9 million, or 71%, to $23.8 million for the year ended December 31, 1998, from $13.9 million for the year ended December 31, 1997, primarily as a result of the above mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $154.7 million at December 31, 1999, compared to $24.6 million at December 31, 1998, an increase of $130.1 million. Cash flows from operating activities were $28.3 million in 1999, compared to $17.5 million in 1998 and $44.6 million in 1997. Cash flows from operating activities in 1999 were primarily a result of earnings for the period and changes in working capital. Cash flows used in investing activities were $6.3 million in 1999, compared to $0.3 million in 1998 and $12.9 million in 1997. The 1999 amount reflects capital expenditures during the period. The 1998 amount reflects capital expenditures of $2.7 million, partially offset by the proceeds received from a sale leaseback transaction. The 1997 amount consists primarily of capital expenditures. Cash flows provided by financing activities during 1999 were $108.2 million, compared to cash flows used in financing activities of $2.6 million in 1998 and $21.8 million in 1997. In March 1999, we repaid our outstanding long-term debt to Time Publishing Ventures, totaling $27.7 million plus accrued interest, with the proceeds of a $15.0 million term loan from Bank of America, N.A., and existing cash of $12.7 million plus accrued interest. The outstanding amount of the loan was repaid in July 1999 with the net proceeds of $25.0 million received from the Kleiner Perkins equity purchase. In October 1999, we completed an initial public offering of 8.3 million shares of class A common stock, raising net proceeds of $132.3 million. Distributions to the members of the LLC were $21.4 million in 1999. The 1998 amount includes a $2.4 million payment of long-term debt to Time Publishing Ventures and distribution to members of the LLC of $0.3 million. The 1997 amount represents distributions to members of the LLC. We have a line of credit with Bank of America in the amount of $10.0 million, which is available to us for seasonal working capital requirements and general corporate purposes. As of December 31, 1999, we had no outstanding borrowings under this facility. We do not intend to pay any dividends for the foreseeable future. We believe that our existing cash balances, together with any cash generated from operations and any funds available under existing credit facilities, will be sufficient to meet our operating and recurring cash needs for foreseeable periods. F-6 25 SEASONALITY AND QUARTERLY FLUCTUATIONS Several of our businesses can experience fluctuations in quarterly performance. For example, Martha Stewart Living magazine is published ten times annually: three issues in each of the first and second quarters and two issues in each of the third and fourth quarters. Martha Stewart Weddings is published four times annually: one issue in each of the second and third quarters and two issues in the fourth quarter. In addition, the number of advertising pages per issue tend to be higher in issues published in the fourth quarter. Revenue and income from operations for the television segment tend to be higher in the fourth quarter due to generally higher ratings and, on occasion, the broadcast of a holiday prime-time television special. Internet/Direct Commerce revenues also tend to be higher in the fourth quarter due to increased consumer spending during that period. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches. YEAR 2000 The Year 2000 issue concerns the inability of information and non information systems to recognize and process date-sensitive information after 1999 due to the use of only the last two digits to refer to a year. This problem could have affected information systems and other information that relies on microprocessors. The Company conducted a review of its computer systems and software to identify any potential malfunctions due to misidentification of the Year 2000. We have also made inquiries of our important third-party vendors, service providers, customers and partners to determine whether our business relationships with these parties could be adversely affected by Year 2000 issues. The Company has not experienced any material adverse consequences related to Year 2000 failures of the Company's or third parties' systems or equipment. While management does not expect any future material issues related to Year 2000 to occur, the Company will continue to monitor these issues and the related costs if they occur. Through December 31, 1999, the Company has spent approximately $0.2 million to address Year 2000 issues. The spending consisted of system evaluation and remediation of internal systems. Total costs are not expected to be materially higher than this amount. F-7 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders Martha Stewart Living Omnimedia, Inc. We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. (a Delaware corporation) and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements, included on pages F-9 through F-24, are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Martha Stewart Living Omnimedia, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements, financial statement schedules and other financial information is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, based on our audits, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York February 9, 2000 F-8 27 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- REVENUES Publishing $145,520 $127,020 $108,694 Television 30,590 23,351 12,396 Merchandising 20,200 15,004 6,919 Internet/Direct Commerce 36,004 14,673 4,812 ------- ------- ------- TOTAL REVENUES 232,314 180,048 132,821 ------- ------- ------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 126,043 82,930 59,148 Selling and promotion 39,442 34,540 31,973 General and administrative 37,947 29,659 21,182 Depreciation and amortization 6,560 5,534 3,927 ------- ------- ------- TOTAL OPERATING COSTS AND EXPENSES 209,992 152,663 116,230 ------- ------- ------- INCOME FROM OPERATIONS 22,322 27,385 16,591 Interest income (expense), net 500 (2,243) (2,195) ------- ------- ------- INCOME BEFORE INCOME TAXES 22,822 25,142 14,396 Income tax provision (benefit) (2,747) 1,336 467 ------- ------- ------- NET INCOME $ 25,569 $ 23,806 $ 13,929 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-9 28 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
1999 1998 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $154,749 $24,578 Accounts receivable, net 41,683 25,260 Inventories 6,163 6,522 Deferred television production costs 2,543 3,038 Other current assets 4,757 275 --------- --------- TOTAL CURRENT ASSETS 209,895 59,673 --------- --------- PROPERTY, PLANT AND EQUIPMENT, net 18,709 11,468 --------- --------- INTANGIBLE ASSETS, net 50,157 53,108 --------- --------- OTHER NONCURRENT ASSETS, net 3,010 1,123 --------- --------- TOTAL ASSETS $ 281,771 $ 125,372 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $36,257 $21,242 Accrued payroll and related costs 4,677 4,056 Accrued interest payable - 1,581 Current portion of deferred subscription income 26,938 26,756 --------- --------- TOTAL CURRENT LIABILITIES 67,872 53,635 --------- --------- DEFERRED SUBSCRIPTION INCOME 8,047 4,722 --------- --------- DEFERRED ROYALTY INCOME 691 1,782 --------- --------- LONG TERM DEBT - 27,650 --------- --------- OTHER NONCURRENT LIABILITIES 5,759 768 --------- --------- TOTAL LIABILITIES 82,369 88,557 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 15,484 shares outstanding 155 - Class B common stock, $.01 par value, 150,000 shares authorized; 34,127 shares outstanding 341 - Capital in excess of par value 193,081 - Retained earnings 5,825 - Members' equity - 36,815 --------- --------- TOTAL SHAREHOLDERS' EQUITY 199,402 36,815 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 281,771 $ 125,372 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-10 29 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
Class A Class B common stock common stock ------------ ------------- Capital in excess Members' of par Retained Equity Shares Amount Shares Amount value earnings Total -------- ------- ------- ------- ------ ------- -------- -------- Balance at December 31, 1996 $ 589 - $ - - $ - $ - $ - $ 589 Net income 13,929 - - - - - - 13,929 Issuance of equity interests 20,508 - - - - - - 20,508 Capital distributions (21,791) - - - - - - (21,791) -------- ------- ------- ------- ------ ------- ------ -------- Balance at December 31, 1997 13,235 - - - - - - 13,235 Net income 23,806 - - - - - - 23,806 Capital distributions (226) - - - - - - (226) -------- ------- ------- ------- ------ ------- ------ -------- Balance at December 31, 1998 36,815 - - - - - - 36,815 Net income 19,744 - - - - - 5,825 25,569 Issuance of equity interests 25,000 - - - - - - 25,000 Capital distributions (21,441) - - - - - - (21,441) Common shares issued in connection with merger of Martha Stewart Living Omnimedia LLC into Martha Stewart Living Omnimedia, Inc. (60,118) 7,111 71 34,127 341 59,706 - - Issuance of shares in connection with initial public offering - 8,280 83 - - 132,172 - 132,255 Issuance of shares for employee benefit plans and stock options - 93 1 - - 1,203 - 1,204 -------- ------- ------- ------- ------ ------- ------ -------- Balance at December 31, 1999 $ - 15,484 $155 34,127 $341 $193,081 $5,825 $199,402 ======== ======= ======= ====== ==== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial statements. F-11 30 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 25,569 $ 23,806 $ 13,929 Adjustments to reconcile Net income to net cash provided by operating activities Depreciation and amortization 6,560 5,534 3,927 Deferred income tax (benefit) expense (3,825) 267 457 Other non cash charges 1,670 -- -- Changes in operating assets and liabilities, net of assets acquired Accounts receivable, net (16,423) (7,314) 341 Inventories 359 (3,561) (1,077) Other current assets (1,457) 66 4,526 Deferred television production costs 495 767 -- Other noncurrent assets (1,087) (209) (838) Accounts payable and accrued liabilities 12,717 4,942 12,075 Deferred royalty income (1,091) (11,420) 12,454 Deferred subscription income 3,507 4,278 (1,621) Other noncurrent liabilities 1,310 368 400 --------- --------- --------- 2,735 (6,282) 30,644 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 28,304 17,524 44,573 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Martha Stewart Living, net of cash acquired -- -- (1,869) Capital expenditures (6,298) (2,730) (11,027) Proceeds from sale leaseback transaction -- 2,389 -- --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (6,298) (341) (12,896) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Principal repayment of long term debt (27,650) (2,350) -- Issuance of equity in LLC 25,000 -- -- Issuance of a class A common stock, -- -- -- net of expenses 132,255 -- -- Distributions to members (21,440) (226) (21,791) --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 108,165 (2,576) (21,791) --------- --------- --------- NET INCREASE IN CASH 130,171 14,607 9,886 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,578 9,971 85 ========= ========= ========= CASH AND CASH EQUIVALENTS, END OF YEAR $ 154,749 $ 24,578 $ 9,971 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-12 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) 1 THE COMPANY Martha Stewart Living Omnimedia, Inc. (together with its subsidiary, the "Company") includes the operations, assets and liabilities of Martha Stewart Living Omnimedia LLC ("MSLO"), a predecessor to the Company, which was merged with and into the Company on October 22, 1999. This merger was accounted for as a combination of companies under common control and accordingly, the financial statements for prior periods have been retroactively restated. In 1997, the Company entered into an agreement with Time Publishing Ventures, Inc. (together with its parent and affiliated companies, "Time") and purchased Martha Stewart Living magazine as well as the rights to any Martha Stewart Living publications, television programs related to Martha Stewart and the Martha by Mail business, as well as related liabilities, for approximately $53,276, including related acquisition costs (the "MSL acquisition"). Time received a promissory note for $30,000 and a 6.27% equity interest in the Company. The purchase price was calculated taking into consideration the special income distribution of $18 million payable to Time pursuant to the limited liability company agreement of the Company. This distribution was made in February 1997. This transaction, which was consummated on February 3, 1997, has been accounted for as a purchase as of January 1, 1997, the effective date on which the assets and liabilities were transferred. In addition, Time and certain of its affiliates entered into transition and other service agreements with the Company which are described in Note 9. The Company is a leading creator of original "how to" content and related products for homemakers and other consumers. The Company's business segments are Publishing, Television, Merchandising and Internet/Direct Commerce. Magazine operations accounted for over 90% of the revenues of the Publishing segment, which also includes book publishing, newspaper syndication and radio advertising revenue. The Television segment includes a television program that airs in syndication in the United States and on cable in Canada, as well as weekly segments on CBS's The Early Show and From Martha's Kitchen, a daily program airing on the Food Channel cable network. The Merchandising segment consists solely of royalty revenues generated by the sale of Martha Stewart branded products. The Internet/Direct Commerce segment comprises the sale of Martha by Mail products through the Company's website and print catalog as well as advertising revenues derived from advertisements on the website. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company's wholly-owned subsidiary. All significant intercompany transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents include cash and all short term securities held for the primary purpose of general liquidity. Such securities mature within three months from the date of acquisition. F-13 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) Revenue Recognition Advertising revenues are recorded upon release of magazines for sale to consumers and are stated net of agency commissions and cash and sales discounts. Allowances for estimated bad debts are provided based upon historical experience. A proportionate share of magazine subscription revenue is recognized as magazines are delivered to subscribers. Newsstand revenues are recognized based on the on-sale dates of magazines and are recorded based upon estimates of sales. Estimated returns are recorded based upon historical experience. Television advertising revenues are recognized when the related commercial is aired and is recorded net of estimated reserves for television audience under delivery. Royalties and television appearance fees are recorded as earned in accordance with specific terms of each agreement. Television Production Costs Television production costs are capitalized and amortized based on revenue earned as a percentage of total revenue sold for the applicable television product. If a total net loss is projected for a particular product, television production costs are written down to net realizable value. Intangible Assets Intangible assets, representing the excess of purchase price over net assets acquired, include the value assigned to subscriber lists, trade names and goodwill, and are being amortized over twenty years. Management reassesses quarterly the appropriateness of both the carrying value and remaining life of intangible assets, principally based on forecasts of future undiscounted cash flows. Inventories Inventories consisting of paper and catalog products are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Advertising Costs Advertising costs, consisting primarily of direct-response advertising, are expensed in the year incurred. F-14 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lease term or, if shorter, the estimated useful lives of the related assets. The useful lives are as follows: Studios and studio equipment 3-10 years Furniture, fixtures and equipment 3-5 years Computer hardware and software 3-5 years Leasehold improvements life of lease
Deferred Subscription Income Deferred subscription income results from advance payments for subscriptions received from subscribers and is amortized on a straight-line basis over the life of the subscription as issues are served. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company's consolidated financial statements. Reclassifications Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation. 3 EQUITY TRANSACTIONS Initial Public Offering On October 22, 1999, the Company completed an initial public offering of 8.3 million shares of Class A common stock at $18.00 per share, raising net proceeds of $132,255 after underwriting discounts, commissions and expenses. Strategic Investment In July 1999, an affiliate of Kleiner Perkins Caufield & Byers, a venture capital firm, acquired 5% of the Company and was issued a warrant to acquire 15% of any publicly traded class of stock issued by the Company that is intended to reflect the performance of the Company's Internet business (as defined in the warrant) in exchange for $25,000 in cash. The warrant may also become exercisable in the event of a business combination relating to, or a sale of all or part of, the Company's Internet business. The warrant, which has an exercise price of $21,000, expires July 27, 2002, and may expire earlier in certain circumstances. $14,250 of the proceeds from this transaction were used to repay the loan from Bank of America, N.A. (See Note 10). F-15 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) 4 ACCOUNTS RECEIVABLE The components of accounts receivable at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Advertising $30,039 $22,720 Newsstand 905 1,698 Licensing 7,321 2,659 Other 9,521 4,188 ------- ------- 47,786 31,265 Less: reserve for credits and uncollectible accounts 6,103 6,005 ------- ------- $41,683 $25,260 ======= =======
5 INVENTORIES The components of inventories at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Paper $3,465 $4,621 Catalog products 2,698 1,901 ------ ------ $6,163 $6,522 ====== ======
6 PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Studios and equipment $ 6,982 $ 6,971 Furniture, fixtures and equipment 6,086 3,189 Computer hardware and software 8,770 1,502 Leasehold improvements 4,502 3,362 ------- ------- 26,340 15,024 Less: accumulated depreciation and amortization 7,631 3,556 ------- ------- $18,709 $11,468 ======= =======
Depreciation expense was $3,610, $2,537 and $1,019 for the years ended December 31, 1999, 1998 and 1997, respectively. 7 EMPLOYEE BENEFIT PLANS Retirement Plans The Company established a 401(k) retirement plan effective July 1, 1997, available to substantially all employees who have completed one year of service. An employee can contribute any percentage of compensation to the plan, up to a maximum of 15% or the maximum allowable contribution by the IRS ($10 in 1999 and 1998), whichever is less. The Company matches 50% F-16 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) of the first 6% of compensation contributed. Employees vest in employer matching contributions over a period of four years of service. The employer matching contributions totaled approximately $385, $259 and $207 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company does not sponsor any postretirement and/or postemployment benefits. Stock Options The Company established the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (the "1997 Option Plan") in November 1997 under which options to purchase 539,564 LLC units were outstanding as of December 31, 1998, based upon an assumed 10 million outstanding LLC units. Under the merger with MSLO in October 1999, the outstanding options for approximately 509,841 LLC units were converted into options to purchase 1,997,374 shares of Class A common stock. The Company has an agreement with Martha Stewart whereby she will periodically return to the Company on a net treasury basis shares of Class B common stock owned by her or her affiliates in amounts corresponding to the number of these options exercised during the relevant period. Accordingly, options outstanding under this plan are not dilutive. Options granted under the plan are exercisable at $0.60 per share and vested 10% at December 31, 1998, and 10% at December 31, 1999, and generally vest 20%, 20% and 40% on December 31 of each of the next three years. Options outstanding under the plan at December 31, 1999 were 1,968,277. The Company has additional stock option plans and agreements that provide for the granting of stock options to employees and non-employee members of the Company's Board of Directors. The options granted under these plans are to purchase class A common stock at the fair market value at the date of grant. Employee stock options vest ratably on each of the first four anniversaries after the grant date. Non-employee director options vest on the first anniversary of the date of the grant of such option. The term of the options granted under these plans are ten years. Total options granted under these plans in 1999 were 5,132,840 at a weighted average exercise price of $17.65 per share. Total options outstanding under the plans at December 31, 1999 were 5,130,940 at a weighted average exercise price of $17.65. The Company accounts for the stock option plans pursuant to Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized for options to acquire shares granted to employees. For options granted to outside consultants, the Company, as prescribed by APB Opinion No. 25, has recognized an expense of $37 for the year ended December 31, 1997. No expense was required to be recognized in any subsequent years. As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," the Company has elected to continue accounting for employee stock compensation under the APB 25 rules, but disclose pro forma results using SFAS No. 123's alternative accounting treatment, which calculates the total compensation expense to be recognized as the fair value of the award at the date of grant. The fair value of options granted were estimated on the grant date using the Black-Scholes option pricing model using the following assumptions: F-17 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA)
1999 1997 ---- ---- Risk-free interest rates 5.78% 5.78% Dividend yields Zero zero Expected volatility 25% zero Expected option life 6 years 5 years Fair market value per share granted $ 6.63 $ 0.15
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options over the options vesting period. The pro forma effect on net income for the years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997 ---- ---- ---- NET INCOME As reported $25,569 $23,806 $13,929 Pro forma $24,569 $23,753 $13,922
Equity Compensation Plans The Company had a Phantom Performance Unit Plan which provided for the grant of performance units to all employees of the Company with at least one year of service, other than officers, who had no minimum service period. The Phantom Plan terminated upon the completion of the initial public offering on October 22, 1999, with no benefits payable to participants. However, the Board of Directors approved the payment of an award to the participants in the Phantom Plan at termination date, whereby the Company distributed 65,800 shares of Class A common stock to the participants on the date of the initial public offering. The company recognized compensation expense of $1,184 in 1999, representing the market value of the shares distributed at the date of the distribution. 8 INCOME TAXES Prior to its conversion to corporate form, the Company operated as a limited liability company and generally was not subject to U.S. federal and state income taxes. The earnings of the Company were subject to local unincorporated business taxes. The results of operations were reportable by the members of the limited liability company on their individual tax returns. Effective with the conversion from a limited liability company on October 22, 1999, the Company became subject to U.S. federal, state and local income taxes. The provision/benefit for income taxes consists of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- CURRENT INCOME TAXES Federal $ 60 State and local 555 $ 578 $ 75 Foreign 463 491 ------- ------- ------- TOTAL CURRENT INCOME TAX EXPENSE 1,078 1,069 75 ------- ------- ------- DEFERRED Federal (2,900) (65) State and local (925) 267 457 ------- ------- ------- TOTAL DEFERRED INCOME TAX EXPENSE (BENEFIT) (3,825) 267 392 ------- ------- ------- $(2,747) $ 1,336 $ 467 ======= ======= =======
F-18 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. In connection with the conversion to a "C" corporation, the Company recognized a deferred tax benefit of $4,810 primarily related to the recognition of net deferred tax assets recorded in accordance with the provisions of SFAS No. 109. Such benefit is included in the income tax provision/benefit in 1999. Significant components of the Company's deferred tax assets as of December 31, 1999 are as follows: DEFERRED TAX ASSETS: Depreciation and amortization $ 435 Inventory obsolescence reserves 1,076 Provision for doubtful accounts 815 Accrued rent 382 Reserve for newsstand returns 405 Other 887 ---------- TOTAL DEFERRED TAX ASSETS $ 4,000 ==========
9 RELATED PARTY TRANSACTIONS During 1997, the Company entered into a services agreement with Time, whereby Time provides certain administrative, purchasing, editing and sales services to the Company, including the purchase of paper. The cost of these services amounted to approximately $26,812, $26,595 and 16,340 in 1999, 1998 and 1997, respectively, including $26,205, $26,010 and $15,265 of paper purchases. The Company also entered into agreements with Time, whereby Time provides fulfillment services for Martha by Mail products and the Company's magazines. The fees for these services amounted to approximately $ 16,063, $11,264 and $9,960 in 1999, 1998 and 1997, respectively. The Company also entered into an agreement with Time, whereby Time provides newsstand distribution services for the Company's magazines. The fees for these services amounted to approximately $1,658, $1,384 and $1,262 in 1999, 1998 and 1997, respectively. The aggregate amounts due to Time, included in accounts payable and accrued liabilities, were approximately $3,682 and $5,431 as of December 31, 1999 and 1998, respectively. Oxmoor House Inc., an affiliate of Time, currently publishes the Martha Stewart Living series of books. In 1997, the Company entered into a contract with Oxmoor House whereby the Company and Oxmoor House split net profits from the sale of books. Income recognized under these agreements was approximately $2,531, $1,995 and $2,567, in 1999, 1998 and 1997, respectively. The Company has entered into a location rental agreement with Martha Stewart, whereby the Company uses various properties owned by Martha Stewart. The fees for use of these properties amounted to $ 2,000, $1,500 and $1,500 in 1999, 1998 and 1997, respectively. F-19 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) The Company used the service of a law firm of which Martha Stewart's son-in-law is a partner. The Company paid an aggregate of approximately $166 and $92 in fees and expenses in respect of such services in 1999 and 1998, respectively. 10 NOTE PAYABLE AND LINE OF CREDIT The Company had a note payable aggregating $27,650 to Time Publishing Ventures, Inc. at December 31, 1998. The note was due on February 3, 2001 and bore interest at the current prime rate plus 1% per annum. In March 1999, the Company entered into an agreement with Bank of America, N.A., formerly known as NationsBank, N.A., for a loan in the amount of $15,000. The proceeds from the loan were used, along with existing cash balances, to pay in full, the note payable to Time Publishing Ventures aggregating $27,650 plus accrued interest. In July 1999, the Company repaid the Bank of America, N.A. loan with the proceeds received from the Kleiner Perkins investment (See Note 3). The Company has an agreement with Bank of America, N.A. for a line of credit in the amount of $10,000 with an interest rate equal to the prime rate per annum. The agreement also requires the Company to pay a commitment fee equal to one-half of 1% per annum of the unused available borrowings. As of December 31, 1999, the Company did not have any amounts outstanding under this agreement. 11 COMMITMENTS AND CONTINGENCIES The Company leases office facilities and equipment for terms extending through 2010 under operating lease agreements. Total rent expense charged to operations for all such leases was approximately $ 3,341, $4,100 and $ 3,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The following is a schedule of future minimum payments under capitalized and operating leases at December 31, 1999:
Capitalized Operating Leases Leases ------ ------ 2000 $ 2,649 $ 7,188 2001 2,649 7,218 2002 2,172 6,825 2003 477 6,837 2004 -- 6,926 thereafter -- 40,459 ------- ------- Total minimum lease payments 7,947 $75,453 ------- ======= Imputed interest (977) ------- Present value of minimum capitalized lease payments 6,970 ------- Current portion 2,651 ------- Long-term capitalized lease obligation $ 4,319 =======
The Company has outstanding letters of credit for $2,252 as security for certain leases as of December 31, 1999. F-20 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) In the ordinary course of business, the Company is involved in various legal proceedings. The Company believes that the ultimate resolution of these claims to the extent not covered by insurance will not, individually or in the aggregate, have a material adverse effect on the Company. 12 OTHER INFORMATION The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and long term debt. The carrying amount of these accounts approximates fair value. Accumulated amortization of intangible assets was $8,851 and $5,901 at December 31, 1999 and 1998, respectively. Amortization expense was $2,950, $2,997 and $2,904 for the years ended December 31, 1999, 1998 and 1997, respectively. Advertising expense was $14,541, $11,564 and $10,440 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest paid was $2,705, $3,962 and $0 for the years ended December 31, 1999, 1998 and 1997, respectively. Income taxes paid were $716, $502 and $ 458 for the years ended December 31, 1999, 1998 and 1997, respectively. 13 INDUSTRY SEGMENTS The Company's industry segments are discussed in Note 1. Segment information for the years ended December 31, 1999, 1998 and 1997 was as follows:
Publishing Television Merchandising Internet/Direct Corporate Consolidated Commerce Charges ---------- ---------- ------------- -------------- --------- ------------ 1999 Revenues $145,520 $ 30,590 $ 20,200 $ 36,004 -- $232,314 Income (loss) from operations 48,525 4,708 20,013 (14,767) (36,157) 22,322 Depreciation and amortization -- 1,569 -- -- 4,991 6,560 Total assets 24,570 20,696 7,265 7,444 221,796 281,771 Capital expenditures -- 98 -- -- 6,200 6,298 1998 Revenues $127,020 $ 23,351 $ 15,004 $ 14,673 -- $180,048 Income (loss) from operations 42,669 3,924 15,305 (4,998) (29,515) 27,385 Depreciation and amortization -- 1,234 -- -- 4,300 5,534 Total assets 21,244 16,021 2,309 8,223 77,575 125,372 Capital expenditures -- 2,313 -- -- 417 2,730 1997 Revenues $108,694 $ 12,396 $ 6,919 $ 4,812 -- $132,821 Income (loss) from operations 33,090 320 6,619 (1,223) (22,215) 16,591 Depreciation and amortization -- 430 -- -- 3,497 3,927 Total assets 20,454 12,004 1,175 3,849 68,224 105,706 Capital expenditures -- 8,530 -- -- 2,497 11,027
F-21 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) 14 EARNINGS PER SHARE (UNAUDITED) The Company became a "C" Corporation on November 22, 1999. Prior thereto, it operated as an LLC. Historical earnings per share have not been presented since prior to becoming a "C" corporation the Company had LLC interests outstanding and no common shares issued or outstanding. Furthermore, historical earnings do not reflect income taxes that would have been charged had the Company been a "C" Corporation. The pro forma adjustment to income tax provision reflects the income taxes that would have been recorded had the Company been a "C" Corporation for all periods presented. Pro forma earnings per share amounts are calculated based upon the weighted average number of common shares outstanding during each period presented. Adjusted pro forma earnings per share amounts are calculated based upon the number of common shares outstanding as if all common shares issued in connection with the Kleiner Perkins investment and the initial public offering were outstanding for all periods presented in order to better reflect comparability between periods. Proceeds received from these transactions have not been included in the calculation of earnings per share. There was no dilution from common stock equivalents outstanding during such periods and accordingly diluted earnings per share are not presented separately.
Year ended December 31, 1999 1998 1997 - ----------------------- ---- ---- ---- Net income $25,569 $23,806 $13,929 Pro forma adjustment to income tax provision 13,877 10,817 7,038 Pro forma net income 11,692 12,989 6,891 Pro forma Earnings per share-basic and diluted $ .28 $ .33 $ .18 Weighted average common shares outstanding 41,720 39,176 39,176 Adjusted pro forma Earnings per share-basic and diluted $ .24 $ .26 $ .14 Weighted average common shares outstanding 49,588 49,583 49,583
F-22 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) 15 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year ended December 31, 1999 First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Revenues $ 53,379 $ 58,123 $ 49,838 $ 70,974 $232,314 Income from operations 7,420 8,045 3,913 2,944 22,322 Net income(1) 6,619 7,547 3,474 7,929 25,569 Pro forma net income(2) $ 3,448 $ 3,965 $ 1,877 $ 2,402 $ 11,692 PRO FORMA(2) Earnings per share-basic and diluted $ .09 $ .10 $ .05 $ .05 $ .28 Weighted average shares outstanding 39,176 39,176 40,596 47,932 41,720 ADJUSTED PRO FORMA(3) Earnings per share-basic and diluted $ .07 $ .08 $ .04 $ .05 $ .24 Weighted average shares outstanding 49,583 49,583 49,583 49,601 49,588 STOCK PRICE PER SHARE-NYSE(4) High -- -- -- 47 1/2 Low -- -- -- 20 5/8
Year ended December 31, 1998 First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- -------- Revenues $ 42,300 $ 43,953 $ 42,580 $ 51,215 $180,048 Income from operations 6,950 8,300 9,044 3,091 27,385 Net income 6,017 7,171 8,285 2,333 23,806 Pro forma net income(2) $ 3,101 $ 3,798 $ 4,703 $ 1,387 $ 12,989 PRO FORMA Earnings per share-basic and diluted $ .08 $ .10 $ .12 $ .04 $ .33 Weighted average shares outstanding 39,176 39,176 39,176 39,176 39,176 ADJUSTED PRO FORMA(3) Earnings per share-basic and diluted $ .06 $ .08 $ .09 $ .03 $ .26 Weighted average shares outstanding 49,583 49,583 49,583 49,583 49,583
(1) Fourth quarter 1999 net income reflects a deferred tax benefit of $4,810 resulting from the conversion to a "C" Corporation. (2) Pro forma net income reflects the income taxes that would have been recorded had the Company been a "C" Corporation for all periods presented. (3) Adjusted pro forma earnings per share amounts are calculated based upon the number of common shares outstanding as if all common shares issued in connection with the Kleiner Perkins investment and the initial public offering were outstanding for all periods presented in order to better reflect comparability between periods. Proceeds received from these transactions have not been included in the calculation of earnings per share. (4) The number of holders of record of Class A and Class B common stock of the Company as of February 25, 2000, was 3,206 and one, respectively. F-23 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) 16 SUBSEQUENT EVENTS (UNAUDITED) Strategic Investment In February 2000, the Company made a cash investment of approximately $13 million in BlueLight.com, an e-commerce company, representing a 5% ownership interest. As part of the transaction, the Company agreed to make its line of Martha Stewart Everyday products, currently available at Kmart, available on BlueLight.com for which the Company will receive royalty payments. Share Repurchase In February 2000, the Company entered into an agreement to repurchase 1.366 million shares of Class A common stock from Time at a purchase price of $23.79 per share, for a total consideration of $32.5 million. Concurrently, Time's put and call rights relating to its remaining equity terminated. F-24 43 MARTHA STEWART LIVING OMNIMEDIA, INC. SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE, CHARGED TO BEGINNING OF COSTS AND BALANCE, END DESCRIPTION YEAR EXPENSES DEDUCTIONS OF YEAR ----------- ---- -------- ---------- ------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: YEARS ENDED DECEMBER 31, 1999........................... $1,202 $1,572 $ 837 $1,937 1998........................... 1,123 293 214 1,202 1997........................... 500(a) 787 164 1,123 RESERVE FOR AUDIENCE UNDER DELIVERY: YEARS ENDED DECEMBER 31, 1999........................... $4,803 $2,159 $2,796 $4,166 1998........................... 1,434 5,724 2,355 4,803 1997........................... 605(a) 1,525 696 1,434
(a) balance at acquisition. F-25 44 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 2.1 -- Agreement and Plan of Merger.* 2.2 -- LLC Membership Interest Purchase Agreement, dated as of July 27, 1999, by and among Martha Stewart Living Omnimedia LLC, KPCB Holdings, Inc., as nominee, and KPCB IX Associates, LLC.* 3.1 -- Registrant's Certificate of Incorporation.* 3.2 -- Registrant's By-Laws.* 4.1 -- Form of Specimen Certificate for Registrant's Common Stock.* 4.2 -- Loan Agreement (line of credit) between NationsBank, N.A. and Martha Stewart Living Omnimedia LLC, dated as of February 3, 1997.* 4.3 -- Amendment No. 1, dated as of June 30, 1998, to the Loan Agreement, dated as of February 3, 1997, between Martha Stewart Living Omnimedia LLC and NationsBank, N.A.* 4.4 -- Amendment No. 2, dated as of March 30, 1999, to the Loan Agreement, dated as of February 3, 1997, between Martha Stewart Living Omnimedia LLC and NationsBank, N.A.* 4.5 -- Warrant for a Percentage of the Internet Business of Martha Stewart Living Omnimedia LLC, dated July 27, 1999, issued to KPCB Holdings, Inc.* 10.1 -- Form of Stockholders' Agreement.* 10.2 -- 1999 Stock Incentive Plan.*+ 10.2.1 -- Amendment Number 1 to 1999 Stock Incentive Plan, dated as of March 9, 2000+ 10.3 -- 1999 Non-Employee Director Stock and Option Compensation Plan.*+ 10.4 -- 1999 Employee Stock Purchase Plan.*+ 10.5 -- Martha Stewart Living Omnimedia LLC Phantom Performance Unit Plan.*+ 10.6 -- Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan.*+ 10.7 -- Form of Employment Agreement, by and between Registrant and Martha Stewart.*+ 10.8 -- Form of Intellectual Property License and Preservation Agreement, by and between Registrant and Martha Stewart.* 10.9 -- Form of Location Rental Agreement, by and between Registrant and Martha Stewart.* 45 10.10 -- Lease, dated as of September 24, 1992, between Tishman Speyer Silverstein Partnership and Time Publishing Ventures, Inc., as amended by First Amendment of Lease dated as of September 24, 1994 between 11 West 42 Limited Partnership and Time Publishing Ventures, Inc.* 10.11 -- Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.12 -- Lease, dated August, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC.* 10.12.1 -- First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc. 10.13 -- Lease, dated as of March 6, 1996, between Newtown Group Properties Limited Partnership and Time Publishing Ventures, Inc., with amendments.* 10.14 -- Lease, dated as of August 1, 1996, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.15 -- Lease, dated as of August 14, 1997, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.16 -- License Agreement, dated January 28, 1997, by and between Martha Stewart Living Omnimedia LLC and Kmart Corporation.* 10.17 -- Severance Agreement, dated September 23, 1999, by and between Martha Stewart Living Omnimedia LLC and Sharon Patrick.*+ 10.18 -- Letter Agreement, dated September 3, 1999, by and between Martha Stewart Living Omnimedia LLC and Helen Murphy.*+ 10.19 -- LLC Unit Option Agreement, dated September 3, 1999, by and between Martha Stewart Living Omnimedia LLC and Helen Murphy.*+ 27.1 -- Financial Data Schedule. * Incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001 + Indicates management contracts and compensatory plans EX-10.2.1 2 AMENDMENT NO. 1 TO 1999 STOCK INCENTIVE PLAN 1 Exhibit 10.2.1 AMENDMENT NO. 1 TO THE MARTHA STEWART LIVING OMNIMEDIA, INC. 1999 STOCK INCENTIVE PLAN The Martha Stewart Living Omnimedia, Inc. 1999 Stock Incentive Plan (the "Plan") is hereby amended, effective March 9, 2000 (the "Effective Date"), as set forth below. 1. The definition of "Fair Market Value" in Section 1 of the Plan is hereby amended to read in its entirety as follows: "Fair Market Value" of the Common Stock means, as of any given date, the price of the Common Stock on the composite transaction tape of the New York Stock Exchange as of the close of the regular business hours of the New York Stock Exchange, without regard to any after-hours trading that may hereinafter be commenced on such exchange, on the most recent prior date for which such closing price is available, or, if the Common Stock is not listed on the New York Stock Exchange, the analogous closing price on the most recent prior date on any other national securities exchange on which the Common Stock is listed or on The Nasdaq Stock Market. If there is no regular public trading market for the Common Stock, the Fair Market Value of the Common Stock shall be determined by the Committee in good faith. EX-10.12.1 3 FIRST LEASE MODIFICATION AGREEMENT 1 Exhibit 10.12.1 FIRST LEASE MODIFICATION AGREEMENT AGREEMENT, made as of the 24th day of December, 1999, by and between 601 WEST ASSOCIATES LLC, having an address at 601 West 26th Street, Suite 900, New York, New York 10001 ("Lessor"), and MARTHA STEWART LIVING OMNIMEDIA, INC., as successor in interest to MARTHA STEWART LIVING OMNIMEDIA LLC having an address at 11 West 42nd Street, New York, New York 10036 ("Lessee"). W I T N E S S E T H: By lease dated August 20, 1999 (which lease, together with all exhibits thereto are hereinafter referred to as the "Lease"), Lessor leased to Lessee the following space: Ninth Floor North 12 through 39, Ninth Floor South 25 through 37, and Ninth Floor West A through J, as more particularly shown on Exhibit A of the Lease (collectively, the "Premises") in the building known as 601 West 26th Street, New York, New York (the "Building"). Lessee desires to rent the additional space on the Ninth Floor known as Ninth Floor East Columns 1 through 12, as well as all corridors and bathrooms and the truck bay area (see Exhibit A attached hereto). NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration by each party to the other paid, the receipt and sufficiency whereof are hereby acknowledged, the parties hereby covenant and agree as follows: 1. Landlord hereby leases to Tenant the following space: Ninth Floor East Columns 1 through 12, so that as of this date the term "Premises" or "Demised Premises" in the "Witnesseth" section of the Lease shall mean (a) Ninth Floor North Columns 12 through 39, (b) Ninth Floor South Columns 25 through 37, (c) Ninth Floor West Columns A through J, and (d) Ninth Floor East Columns 1 through 12, and appurtenant truck bays, bathrooms and corridors (as shown on Exhibit A attached hereto) which space constitutes the entire rentable area of the Ninth Floor of the Building. 2. Article 42 of the Lease is hereby amended to delete the last two sentences and to replace them with the following: "Landlord anticipates that Landlord's Work to the Premises shall be substantially completed on or about January 2, 2000. In the event Landlord's Work to the Premises is not completed on or before January 2, 2000, Tenant shall be entitled to an abatement against Fixed Rental in addition to the Credit defined in Article 43.2, in the amount of $4,920.36 multiplied by 2 the number of days between January 2, 2000 and the date Landlord's Work to the Premises is substantially complete." 3. Article 42 of the Lease is hereby amended to add the following: "Notwithstanding anything set forth herein to the contrary, Tenant acknowledges that the space designated on Exhibit C attached hereto (the "Chelsea Storage Space") is currently occupied by Chelsea Storage, the existing occupant, and that as of the Commencement Date the Premises shall not include the Chelsea Storage Space. Landlord represents that the termination date set forth in the lease between Landlord and Chelsea Storage is April 30, 2001. Landlord shall be obligated to deliver the Chelsea Storage Space to Tenant upon the vacatur of said space by the existing tenant, its successors, assigns and subtenants. Upon delivery of the Chelsea Storage Space, in the condition required under this Lease, the Chelsea Storage Space shall be deemed to be part of the Premises (the "Chelsea Storage Inclusion Date"). Tenant agrees that the continued occupancy of the Chelsea Storage Space by Chelsea Storage shall not give rise to any offset, claim or defense against Landlord or an abatement in rent, except as follows: in the event Chelsea Storage does not vacate the Chelsea Storage Space on or before March 1, 2000, Tenant shall be entitled to an abatement against the Fixed Rental in the amount of $555.56 for each day after March 1, 2000 that Chelsea Storage has not vacated the Chelsea Storage Space. Landlord shall have twenty (20) days from the date Chelsea Storage vacates the Chelsea Storage Space within which to complete the applicable items of Landlord Work, and during such twenty (20) day period, the $555.56 per diem abatement shall be tolled. In the event Landlord has not substantially completed the applicable items of Landlord's Work within said twenty (20) day period, the abatement shall recommence upon the twenty-first (21st) day and shall continue until the applicable items of Landlord's Work to the Chelsea Storage Space have been substantially completed and the Chelsea Storage Space has been delivered to Tenant. "With regard to the space described on Exhibit A attached hereto (the "Northwest Space"), from and after the date the Credit in the amount of $848,526, as described in Article 43, has been fully exhausted, Tenant shall be entitled to an abatement against Fixed Rental in the sum of $526.03 per day for each day Tenant does not use all or part thereof while the Chelsea Storage Space has not been delivered to Tenant in the required condition. Tenant agrees that for the purposes of this paragraph Tenant shall be deemed to be using the Northwest Space during the performance of its Initial Installations to the Northwest Space. Tenant shall not be deemed to be using the Northwest Space once the Initial Installations to said space have been substantially completed. However, if Tenant uses for any purpose (other than for the storage of construction materials during the performance of Tenant's Initial Installations) all or part of the Northwest Space and the Chelsea Storage Space has not been delivered to Tenant in the required condition, the abatement shall be reduced to $263.01 per diem commencing on the date Tenant uses all or part of the Northwest Space (irrespective of the purpose) through the date the Chelsea Storage Space is delivered to Tenant in the required condition. Upon the delivery of the Chelsea Storage Space to Tenant 3 in the required condition, the abatement shall terminate, irrespective of whether or not Tenant uses any or all of the Northwest Space. "For the purposes of setting the Commencement Date, Landlord acknowledges that as of the date of this Agreement, there have been no Tenant Delays, as defined in Article 46.2 of the Lease." Landlord shall, at its sole cost and expense, indemnify, defend and hold Tenant and Tenant's shareholders, officers and employees harmless from and against any and all claims, suits, actions, damages, fees, costs, court costs, expenses (including, but not limited to, all reasonable fees and disbursements of attorneys engaged by Tenant and liabilities which may be incurred by or imposed on Tenant or which may arise in connection with any claims, suits or actions by Chelsea Moving & Storage, Inc. ("Chelsea Storage") (or anyone claiming by or through Chelsea Storage), Alex Saidon and/or Naomi Saidon, or from the enforcement of this indemnity, which may be entered or which may arise only with respect to or on account of a claim by Chelsea Storage, Alex Saidon and/or Naomi Saidon against Tenant for interference with contractual relations, Tenant's occupancy or use of the Chelsea Storage Space, or any common areas of the 9th Floor of the Building, or relating to Tenant entering into the Lease or this Agreement, or exercise of its rights under the same (including, without limitation, the claims made in the pending litigation), and specifically excluding any inability of Tenant to use the Chelsea Storage Space or make full use of the Northwest Space, which is otherwise provided for herein. Tenant shall give Landlord written notice of any claims under this paragraph promptly upon becoming aware of such claim. All such actions, suits, claims, damages and/or proceedings shall be resisted and defended by counsel of Landlord's choice, at Landlord's sole cost and expense. The indemnity under this paragraph runs for the benefit of Tenant and Tenant's shareholders, officers and employees only, and does not create any right or benefit in favor of any other person or entity. The consent of Tenant to Landlord's settlement of any claims by Chelsea Storage covered by this indemnity provision shall be required if Tenant is adversely affected by the terms of such settlement. 4. Article 43 of the Lease is hereby amended so that Articles 43.1.1 (i) through (x) are deleted and replaced with the following: 43.1.1 Prior to the Chelsea Storage Inclusion Date, a fixed rental ("Fixed Rental") at an annual rate of: (i) $3,394,104.00 ($282,842.00 per month) for the lease year commencing on the Commencement Date (defined in Article 42 above) and continuing thereafter to and including the day immediately preceding the first anniversary of the first day of the month after the Commencement Date. Each twelve (12) month period thereafter shall be deemed a "Lease Year"; 4 (ii) $3,487,441.86 ($290,620.16 per month) for the second lease year commencing the first day of the first month of the Second Lease Year and continuing thereafter until the last day of the last month of the Second Lease Year; (iii) $3,583,346.51 ($298,612.21 per month) for the lease year commencing on the first day of the first month of the Third Lease Year and continuing thereafter through and including the last day of the last month of the Third Lease Year; (iv) $3,681,888.54 ($306,824.05 per month) for the lease year commencing on the first day of the first month of the Fourth Lease Year and continuing thereafter through and including the last day of the last month of the Fourth Lease Year; (v) $3,783,140.48 ($315,261.71 per month) for the lease year commencing on the first day of the first month of the Fifth Lease Year and continuing thereafter through and including the last day of the last month of the Fifth Lease Year; (vi) $3,887,176.84 ($323,931.40 per month) for the lease year commencing on the first day of the first month of the Sixth Lease Year and continuing thereafter through and including the last day of the last month of the Sixth Lease Year; (vii) $3,994,074.20 ($332,839.52 per month) for the lease year commencing on the first day of the first month of the Seventh Lease Year and continuing thereafter through and including the last day of the last month of the Seventh Lease Year; (viii) $4,103,911.24 ($341,992.60 per month) for the lease year commencing on the first day of the first month of the Eighth Lease Year and continuing thereafter through and including the last day of the last month of the Eighth Lease Year; (ix) $4,216,768.80 ($351,397.40 per month) for the lease year commencing on the first day of the first month of the Ninth Lease Year and continuing thereafter through and including the last day of the last month of the Ninth Lease Year; and (x) $4,332,729.95 ($361,060.83 per month) for the lease year commencing on the first day of the first month of the Tenth Lease Year and continuing thereafter through and including the last day of the last month of the Tenth Lease Year. 5 43.1.2 From and after the Chelsea Storage Inclusion Date, the Fixed Rental shall be increased to the following annual rate, provided however that there shall be no retroactive increase of the Fixed Rental due for any period prior to the Chelsea Storage Inclusion Date: (i) $3,586,104.00 ($298,842.00 per month) for the lease year commencing on the Commencement Date (defined in Article 42 above) and continuing thereafter to and including the day immediately preceding the first anniversary of the first day of the month after the Commencement Date. Each twelve (12) month period thereafter shall be deemed a "Lease Year"; (ii) $3,684,721.86 ($307,060.16 per month) for the second lease year commencing the first day of the first month of the Second Lease Year and continuing thereafter until the last day of the last month of the Second Lease Year; (iii) $3,786,051.71 ($315,504.31 per month) for the lease year commencing on the first day of the first month of the Third Lease Year and continuing thereafter through and including the last day of the last month of the Third Lease Year; (iv) $3,890,168.13 ($324,180.68 per month) for the lease year commencing on the first day of the first month of the Fourth Lease Year and continuing thereafter through and including the last day of the last month of the Fourth Lease Year; (v) $3,997,147.76 ($333,095.65 per month) for the lease year commencing on the first day of the first month of the Fifth Lease Year and continuing thereafter through and including the last day of the last month of the Fifth Lease Year; (vi) $4,107,069.32 ($342,255.78 per month) for the lease year commencing on the first day of the first month of the Sixth Lease Year and continuing thereafter through and including the last day of the last month of the Sixth Lease Year; (vii) $4,220,013.73 ($351,667.81 per month) for the lease year commencing on the first day of the first month of the Seventh Lease Year and continuing thereafter through and including the last day of the last month of the Seventh Lease Year; (viii) $4,336,064.11 ($361,338.68 per month) for the lease year commencing on the first day of the first month of the Eighth Lease Year and continuing 6 thereafter through and including the last day of the last month of the Eighth Lease Year; (ix) $4,455,305.87 ($371,275.49 per month) for the lease year commencing on the first day of the first month of the Ninth Lease Year and continuing thereafter through and including the last day of the last month of the Ninth Lease Year; and (x) $4,577,826.78 ($381,485.57 per month) for the lease year commencing on the first day of the first month of the Tenth Lease Year and continuing thereafter through and including the last day of the last month of the Tenth Lease Year. 5. The Credit defined in Article 43.2 shall be $848,526.00 in lieu of $447,966.00. Tenant shall be entitled to an additional credit against Fixed Rental commencing on the Chelsea Storage Inclusion Date. The amount of the credit shall be the escalated monthly Fixed Rent for the Chelsea Storage Space only as of the Chelsea Storage Inclusion Date, multiplied by three (3). The credit for the Chelsea Storage Space shall be applied in three successive monthly installments commencing on the Chelsea Storage Inclusion Date. 6. The definition of Tenant's Proportionate Share in Article 48.5 is hereby changed from 3.64% to 7.30%, provided however that prior to the Chelsea Storage Inclusion Date the Tenant's Proportionate Share shall be deemed to be 6.91%. The maximum annual Tax Payments described in Article 48.6 for each calendar year (or part thereof, with pro ration for partial lease years) are hereby increased to the following amounts: (a) from the Commencement Date through December 31, 2002, $37,355.25 per annum; from January 1, 2003 through the Termination Date, $52,297.35 per annum. 7. Article 44.3 is amended to provide that the expiration date of the Second Renewal Period is November 30, 2019 and not November 30, 2029. 8. Article 45, Sections 45.3.1 through 45.3.6 are deleted and replaced with the following: 45.3.1 Upgrade two (2) existing freight elevators by February 15, 2000; 45.3.2 Install two (2) new passenger elevators in the existing truck elevator shaft by April 1, 2000. 45.3.3 Landlord will no longer be responsible to renovate public corridors. Landlord will renovate existing bathrooms to Building Standard on the Ninth Floor of the Building by January 31, 2000; 45.3.4 Upgrade (i.e., new cabs and controls) the existing four manual passenger elevators serving the Premises to high speed automatic elevators by June 15, 2000; and 7 45.3.5 Upgrade lobby of the Building as contemplated, or in other commercially reasonable manner, by January 15, 2000. 45.3.6 Provide the electrical service to a single point within the Premises mutually agreed upon by Landlord and Tenant as required under Article 84.1 of the Lease, as modified hereby. 45.3.7 Install a base, Class E fire alarm system within the Building, and bring to the perimeter of the Premises a connection to said system, by July 1, 2000. 9. Article 51.15 of the Lease is hereby amended to include the following: "Notwithstanding the foregoing, Tenant may sublet, without Landlord's consent, up to a total of 20,000 square feet of the Additional Space to no more than three (3) subtenants collectively for terms no greater than five (5) years. Tenant shall not be required to pay to Landlord any excess consideration with regard to said sublease for the first three (3) years of the sublet term. Tenant shall pay to Landlord one-third (1/3rd) of the excess consideration in the fourth (4th) year of the sublet term and one-half (1/2) of the excess consideration in the fifth (5th) year of the sublease term." 10. The amount of the security deposit required under Article 32 is hereby increased to $1,793,052. Simultaneously herewith, Tenant shall deliver to Landlord a check in the amount of $448,560 and a letter of credit in the amount of $448,560 (which letter of credit complies with the provisions of Article 59 of the Lease) representing the difference between the new security deposit and the amount already paid to Landlord. 11. (a) Tenant acknowledges that the tenant ABC Die is located above part of the Premises and that ABC Die's machinery has generated considerable disruptive noise and vibrations above a certain area within the Premises, estimated to be approximately 20,000 square feet, as is described on Exhibit _____ (the "Disrupted Space Beneath ABC Die"). Tenant agrees that the continued occupancy and the operation of machinery by ABC Die or any successor assignee or subtenant shall not give rise to any offset, claim or defense against Landlord or an abatement in Fixed Rental, except as set forth below. Landlord agrees that if Tenant does not use all or part of the Disrupted Space Beneath ABC Die (Tenant agrees that for the purpose of this paragraph, Tenant shall be deemed to be using said space during the performance of its Initial Installations; therefore, Tenant shall not be deemed to be using the Disrupted Space Beneath ABC Die once the Initial Installations to said space have been substantially completed.), Tenant shall be entitled to an abatement in Fixed Rental from and after the date the Credit in the amount of $848,526.00 as described in Article 43.2 has been fully exhausted, in the amount of $1,315.07 per diem for so long as ABC Die or any successor assignee or subtenant occupies and operates its machinery above the Disrupted Space Beneath ABC Die, except as set forth below. 8 If Tenant uses all or part of the Disrupted Space Beneath ABC Die for any purpose (other than for the storage of construction materials during the performance of Tenant's Initial Installations), then the abatement shall be reduced to $657.53 per diem commencing on the date Tenant uses all or part of the Disrupted Space Beneath ABC Die. (b) Notwithstanding anything set forth herein to the contrary, upon the occurrence of (i) the permanent cessation by ABC Die, and all successors, assignees or subtenants of the use of its machinery, or (ii) ABC Die and all successors, assignees or subtenants installing its machinery on foundations and/or skids as required under its lease, irrespective of whether Tenant has taken possession of, uses or occupies any or all of the Disrupted Space Beneath ABC Die, or (iii) the objectionable noise heard within the Disrupted Space Beneath ABC Die ceases permanently, all rent abatements under this section shall cease. (c) In the event neither of the events described in (b) (i) or (ii) above occurs on or before July 1, 2000, then Tenant shall be entitled to a rent abatement, in addition to the abatement described in paragraph 11(a) above, in the amount of $273.97 per day for each day after July 1, 2000 that either of the events described in (b) (i) or (ii) above has not occurred. In the event neither of the events described in (b) (i) or (ii) above occurs on or before July 1, 2002, then the additional rent abatement shall increase from $273.97 per day to $547.95 per day for each day after July 1, 2002 that either of the events described in (b) (i) or (ii) above has not occurred. (d) Landlord shall not knowingly enter into leases with new tenants for the space above the Premises where the noise levels generated by said tenant in connection with the operation of its business shall exceed NC-35, subject to Section 97.2 of the Lease regarding the installation of generators. Landlord shall insert provisions in each of its leases for the space above the Premises, which provisions will prohibit noise levels emanating from such space to exceed NC-35. (e) Landlord agrees that it will not extend the lease expiration date of the ABC Die lease beyond the stated expiration date, which Landlord represents to be May 31, 2006. Landlord shall not enter into any agreement with ABC Die whereby it would be in Landlord's economic interest not to promote the occurrence of any of the events listed in subparagraphs (b)(i), (ii) and (iii). 12. In no event shall Tenant's failure to use the Disrupted Space Beneath ABC Die or Landlord's failure to deliver the Chelsea Storage Space entitle Tenant to (i) terminate the Lease pursuant to Article 87 of the Lease, (ii) or otherwise claim actual or constructive eviction or breach of lease and/or breach of any express or implied warranty of habitability or fitness for use. The provisions of this Section 12 shall not limit any of Tenant's remedies 9 in the event Landlord defaults in its obligations under Article 97 of the Lease or under Section 11(d) or (e) above or Section 3 hereof. 13. Provided that Tenant is not in default under the terms of this Lease beyond applicable grace and notice periods, Tenant shall have an option (the "Option"), which must be exercised by written notice to Landlord, to lease additional space (each an "Option Space") in the Building, which Option Space is comprised of distinct areas known as (i) ABC-I consisting of 61,259 rentable square feet, (ii) ABC-II consisting of 11,667 rentable square feet , (iii) Hunt Slonem consisting of 9,635 rentable square feet , and (iv) LCW consisting of 12,339 rentable square feet. Each Option Space is depicted on Exhibit B attached hereto. The "Inclusion Date" of each of (i) ABC-I, (ii) ABC-II, (iii) Hunt Slonem and (iv) LCW, if Tenant elects to exercise the Option with regard to the Option Spaces, shall be the date Landlord delivers the Option Space to Tenant in the required condition. The stated expiration dates of the respective leases for the Option Spaces are as follows: (i) ABC-I and ABC-II: May 30, 2006; (ii) Hunt Slonem: December 31, 2003; and (iii) LCW: June 30, 2004. In the event Tenant intends to exercise an Option, the dates by which the Option must be exercised with respect to each Option Space is as follows: (i) ABC-I and ABC-II on or before January 31, 2006, (ii) Hunt Slonem on or before August 31, 2003, and (iii) LCW on or before February 29, 2004, time being of the essence. In the event Tenant does not exercise its respective Option by the date set forth above, Tenant's Option with respect to such Option Space shall terminate, and Landlord shall have no further obligation to Tenant with regard to such Option Space except as set forth in Article 89. In the event any of the Option Spaces are to become vacant prior to their stated lease expiration dates, Landlord shall promptly send a notice to Tenant informing Tenant of same and specifying the date (the "Availability Date") Landlord anticipates the Option Space to be available. If the Availability Date is more than two hundred and ten (210) days after the date of Landlord's notice to Tenant, Tenant may, on or before the "Prior Availability Exercise Date" exercise the option with regard to such Option Space, time being of the essence to exercise the Option on or before such date. "Prior Availability Exercise Date" shall be the date which is {(x) thirty (30) days plus (y) (i) the number of days between the date of Landlord's notice and the Availability Date, less (ii) two hundred ten (210)} days from the date of Landlord's notice. If the Availability Date is two hundred and ten (210) days or less from the date of Landlord's notice, Tenant may, within thirty (30) days after the date of Landlord's notice, exercise the Option with regard to such Option Space, time being of the essence to exercise the Option within said thirty (30) day period. Within ten (10) days after Tenant notifies Landlord that an Option has been exercised (irrespective of whether the information referred to in subparagraphs (a) and (b) below exist), Landlord shall notify Tenant in writing of the rental to be charged for the Option Space as well as the other economic terms of the proposed tenancy (the "Rental Notice"), which rental and other economic terms shall be the greater of (i) the rentable square footage of the Option Space multiplied by the then escalated per square foot Fixed Rental of the Premises, as escalated for the balance of the Lease Term, and the prorated 10 additional rent (but subject to paragraph 25 hereof) and concessions provided for in the Lease, and (ii) 90% of the (a) then current rental rate and other economic terms and/or concession provisions and security requirements then prevailing in leases in the Building for space comparable in size and for similar length terms and starting dates, on the three (3) floors above or below the Premises executed contemporaneously with Tenant's exercise of the Option, or if no leases have been contemporaneously executed, (b) the rental rates and other economic terms and/or concession provisions and security requirements proposed in written offers from bona fide third parties for space comparable in size and for similar length terms, on the three (3) floors above or below the Premises. Landlord shall provide Tenant with copies of all applicable leases and bona fide offers simultaneously with Landlord's notice of the rental rate. Tenant shall then have ten (10) days after receipt of the rental rate and other terms within which to rescind, by written notice to Landlord, the exercise of the Option. In the event there are no contemporaneous leases or bona fide third party offers as provided above, and if Landlord and Tenant are not able to otherwise agree on the rental to be paid by Tenant, Landlord and Tenant agree to submit the dispute to arbitration in accordance with Article 44, section 44.5 of the Lease, provided however that the criteria to be used by the arbitrators in computing a rental rate shall be limited to relevant factors applicable to the Building only, and not factors applicable to any other building whether or not located in the same neighborhood as the Building. In addition, Landlord agrees that the maximum amount of Fixed Rental to be set in the arbitration proceeding shall be the amount set forth in the Rental Notice. In the event Tenant exercises its Option under any of the scenarios set forth in this Article, Tenant shall pay fixed rent and additional rent and deliver all required security as of the date Landlord delivers the Option Space in the condition required under this Lease, at the rates set forth in the Rental Notice (or in the More Favorable Offer, defined below), irrespective of whether Landlord and Tenant have entered into a written modification of lease. Tenant shall continue to pay rent and additional rent at the rates in the Rental Notice or the More Favorable Offer until such time as a written lease modification is executed by Landlord and Tenant. Landlord shall immediately credit Tenant with any rent overpayments as then agreed to. After the execution of the lease modification agreement, Tenant shall pay fixed and additional rent at the rates set forth therein. Tenant's Proportionate Share shall be increased based upon the rentable square footage of the Option Space. For the purpose of computing the increase in Tenant's Proportionate Share, the total square footage of the Building shall be deemed 2,050,000. Upon the Inclusion Date with respect to any of the Option Spaces referred to in this paragraph, such space shall be deemed to be added to and included in the Premises and shall be under and subject to all the terms, covenants and conditions of this Lease, including, without limitation, the expiration of the term hereof. 11 Notwithstanding anything set forth to the contrary, Landlord shall perform work to ready an Option Space for occupancy similar to Landlord's Work described on Exhibit B of the Lease, and Tenant shall be entitled to a three (3) month rent concession with respect thereto. Notwithstanding anything contained herein to the contrary, in the event that the time for Tenant to exercise any particular Option expires without Tenant having exercised the same, or Tenant rescinds the exercise of an Option within the ten (10) day period set forth above (the date of such expiration or giving of rescission notice the "Option Free Date"), then for a period of ninety (90) days thereafter, Landlord shall be free to lease the applicable Option Space to any third party provided the economic terms of such deal are not such that the third party's net effective rent is more than seven and one-half percent (7.5%) less than what had been quoted to Tenant in the Rental Notice (the "Option Free Terms"). In the event the proposed third party deal has a net effective rent which is more than 7.5% less than what had been quoted Tenant, Landlord shall offer such deal to Tenant and Tenant shall then have ten (10) business days within which to accept or reject the offer to lease the applicable Option Space on the Option Free Terms. If Tenant rejects such offer, then Landlord shall be free to lease such space to a third party on the Option Free Terms. If Landlord and the third party fail to execute a lease containing the Option Free Terms within said ninety (90) day period, Tenant's right under Article 89 shall become applicable. If Landlord and the third party execute a lease containing the Option Free Terms within said ninety (90) day period, then, at Tenant's request, Landlord shall provide Tenant with a copy thereof to confirm that the seven and one-half percent (7.5%) limit was not exceeded. If Landlord is unable to give possession to Tenant of any of the Option Spaces provided for in this Article by reason of the holding over or retention of possession by any tenant, tenants or occupants or for any other reason beyond the reasonable control of Landlord, then and in such event the Inclusion Date with respect to the Option Space shall not be deemed to occur until such later date as said Option Space is delivered in the condition required and available for Tenant's occupancy, and such later date shall be deemed to be the Inclusion Date for the purpose of this Article. Notwithstanding any of the foregoing provisions of this Article, if any Option Space is not available for a period of six (6) months after the Availability Date, Tenant shall give notice to Landlord within thirty (30) days after the expiration of such six (6) month period that either (i) it does not want to occupy the Option Space, and, in such event, rent, additional rent and other charges shall be adjusted on a per square foot basis, and any such rent or other charges prepaid by Tenant with respect to such Option Space shall be refunded to Tenant, and neither Landlord nor Tenant shall have any liability to the other with respect to said Option Space, except pursuant to Article 89, or (ii) it shall wait an additional period of six (6) months (commencing on the seventh [7th] month from the Availability Date) for Landlord to give possession of the Option Space, before notifying Landlord that it does not want to occupy the Option Space. This process shall continue until such time as either Tenant 12 accepts delivery of the applicable space or rescinds its Option to lease the space. This process shall also apply to the space offered pursuant to Article 89. All of the Options contained in this Article are independent options, and the exercise or non-exercise of any Option or part thereof shall in no way affect Tenant's right to exercise any other Option, whether in whole or in part. Landlord agrees not to voluntarily extend any of the stated expiration dates of the existing leases for the Option Spaces. 14. Exhibit B "Landlord's Work" is hereby modified as follows: (i) In lieu of Landlord's obligation under item 7, Landlord will deliver the floor in the Premises in an "as is" condition. (ii) In lieu of Landlord's obligation under item 9, Landlord will remove all sprinkler branches except those necessary for egress during construction. Landlord will leave the mains in place. (iii) Landlord will not demolish or remove existing water or waste risers for the former bathrooms. (iv) Landlord will leave all existing overhead heating units in the Premises in their "as is" condition. Landlord will install working perimeter radiators where ever there are existing radiator stems. Landlord will not be responsible to provide any additional radiators or heating units or other heat to the Premises. Landlord will not be obligated to repair any non-functioning overhead heating units or radiators within the Premises. (v) Modifying item 2, Landlord will not paint any windows or window frames in the Premises. In consideration of the modifications to Exhibit B, Landlord shall give Tenant a credit against the first months Fixed Rent due under this Lease in the amount of $150,000.00. With regard to item 2 of Exhibit B, (a) Tenant acknowledges that Landlord is obligated to re-putty only those window frames where the existing putty is not in good condition, and that as a result of the re-puttying, and the existing putty which is in good condition, there shall be several different colors of putty on the window frames. Tenant also acknowledges that placement of putty requires extensive manual labor, which by its nature cannot be perfect or absolutely uniform, and as such, Tenant agrees to accept the Premises with putty imperfections, some of which Tenant may choose to re-putty, in consideration for which, Landlord shall give Tenant a credit against the first months Fixed Rent due under this Lease in the amount of $10,000.00; (b) For the long term maintenance of the Premises, Landlord 13 recommends that it is in the Tenant's interest that up to twenty (20) window vent sections and steel frame supports be replaced. Tenant agrees that Landlord may complete the installation of the new window sections and steel frame supports within approximately sixty days after the Commencement Date and that Tenant shall have no offset or claim against Landlord for the completion of such work after the Commencement Date; (c) Tenant has requested a uniform look through out the Premises regarding the size of the window panes and surrounding metal frames. Tenant has requested that Landlord remove the oversized window panes and replace same with fabricated steel frames and panes of uniform size. Tenant agrees that Landlord may complete the installation of the new steel frames and uniform panes within sixty (60) days after the Commencement Date and that Tenant shall have no offset or claim against Landlord for the completion of such work after the Commencement Date. Nothing contained herein shall be deemed a waiver of any rights of Tenant in the event Landlord has not taken reasonable efforts to minimize interference with the operation of Tenant's business during performance of the work. In the event Landlord has not commenced and diligently pursued the installation of the window vent sections, steel frame supports or steel frames and uniform panes within one hundred (100) days after the Commencement Date, Tenant may install same and offset the cost of installation against the next installment of Fixed Rent then due. 15. Article 84 of the Lease, as amended in paragraph 8 above, is hereby further amended to provide that Landlord shall provide Tenant with an additional 200 amperes of electrical service at 208 volts to a second point in the Premises. The February 1, 2000 date in Section 84.1 is hereby changed to April 15, 2000. Upon receipt of the 480 volt service, Tenant shall return to Landlord the additional 200 amperes of electrical service at Tenant's sole cost and expense. Landlord shall also provide Tenant with 12 watts per average of rentable and useable square foot for the additional space demised hereby in accordance with Article 84 of the Lease. 16. Article 89 of the Lease is hereby deleted and replaced with the following: "ACCOMMODATION RIGHT OF FIRST OFFER Provided that this Lease is in full force and effect and Tenant is not in default in respect of its monetary obligations hereunder beyond any applicable period of notice, cure and grace, if at any time after Tenant's Option described in Section 13 of the First Lease Modification Agreement above has expired, but otherwise during the term of this Lease, Landlord receives a bona fide offer to lease space on the tenth floor of the Building (the "Adjacent Space"), Landlord shall send a notice to Tenant informing Tenant of same, setting forth the name of the offeree and the terms of the offer, and specifying the date Landlord anticipates the Adjacent Space to be available. Tenant shall then have the right, exercisable within ten (10) business days after the date of Landlord's notice, to notify Landlord in writing of Tenant's desire to lease the Adjacent Space on the terms set forth in the offer, in which event Landlord and Tenant shall promptly 14 execute an agreement modifying this lease to include such space at the rental rate and other terms and conditions specified in Landlord's notice. "In the event Tenant fails to exercise its option for the space specified in the notice within such ten (10) business day period, then Landlord shall be free to lease the Adjacent Space to any third party at the terms set forth in the above described offer. Landlord shall provide Tenant with evidence thereof if Landlord concludes a transaction. "Upon the expiration of any third party tenant's lease of any part of the Adjacent Space, Tenant shall continue to have a right of first offer with respect to such space on the terms set forth herein." 17. Exhibit D attached hereto is a substitute for the Exhibit D attached to the Lease, so that the Site described in Article 94 of the Lease refers only to the Southwest Corner of the Ninth Floor Roof and not the Northwest Roof. 18. Tenant hereby acknowledges that the three (3) pipe and conduit shafts to be built by Landlord adjacent to the three (3) stairwells in the Premises (see Exhibit E) are not part of the Premises, but are retained by Landlord for pipe and conduit use. Tenant may use its pro rata share of such shafts for the installation of its pipe or conduit runs. 19. In Article 59, the references to Article 31 and 34 are hereby changed to Article 32. 20. In Article 63, the word "General" is hereby deleted. 21. In Article 69, Section 69.1 and 69.4, the threshold amount for alterations requiring Landlord's consent is increased from $150,000.00 to $300,000.00. Landlord agrees that the threshold amount will increase proportionately whenever the square footage of the Premises is increased. 22. The last line of Section 70.2 is hereby modified to provide that the form Non Disturbance Agreement is in the form previously executed by Landlord and Tenant. Landlord shall obtain a non-disturbance agreement relating to this Agreement from the holders of Superior Mortgages in recordable form, along with all documents needed for recordation. Landlord shall cooperate with Tenant and take all action within its ability to record the Non Disturbance Agreements previously executed. 23. Landlord and Tenant represent and warrant to each other that it has neither consulted nor negotiated with any broker or finder with regard to this Agreement other than Insignia/ESG, whose commission shall be paid by Landlord pursuant to Landlord's separate agreement with said broker. Landlord and Tenant agree to indemnify and hold each other harmless from any damages, costs and expenses (including reasonable attorneys' fees incurred in defending an action or claim or enforcing this indemnity) suffered by Landlord or Tenant by reason of any breach by the indemnifying party of its 15 representation, warranty or agreement described above. The provisions of this paragraph shall survive the expiration or earlier termination of this Lease. 24. Tenant acknowledges that its obligation to pay the Additional Rental for the tap in fee and the annual usage fee described in Article 83 shall apply to the Premises, as expanded by this Agreement. Tenant hereby agrees to pay said fees to Landlord simultaneously herewith on the basis of 375 tons of HVAC for the Premises. In the event Tenant's plans call for more tonnage, upon submission of such plans to Landlord or the Building Department, Tenant shall, upon ten (10) days' notice, pay for the cost of the tap charge and annual usage fee on all HVAC tons above 375. Landlord shall provide the condenser water for the additional space now included in the Premises. 25. Landlord agrees that there shall not be any contribution from Tenant towards the cost of the installation of the fire alarm system or roof applicable to the Space known as Ninth Floor East Columns 1 through 12 or any of the Option Spaces. 26. Article 100 of the Lease is hereby modified to provide that Landlord shall, within the next forty-five (45) days, weather permitting, remove the existing roof and all asbestos above the Premises and install temporary waterproof roofing material. The permanent roof replacement shall still begin in the spring of 2000, unless Landlord can, in its sole discretion, install the new roof sooner. In the event, prior to or in connection with the installation of the permanent roof, the paint on the ceiling of the Premises below the roof peels, Landlord shall, at its cost, scrape and repaint the effected areas beneath the roof area. Tenant agrees that Landlord's installation of the new roof and scraping and repainting the ceiling after Tenant completes its Initial Installation or moves into the Premises for the operation of its business shall no give rise to any offset or claim against Landlord. Landlord agrees, however, to reasonably cooperate with Tenant in connection with the coordination and performance of the roof work and to complete the work in a timely manner. Nothing herein shall be deemed a waiver of any rights of Tenant in the event Landlord has not taken reasonable efforts to minimize interference with the operation of Tenant's business during the performance of the work. 27. Landlord agrees that all abatements of Fixed Rent provided for in the Lease as modified hereby shall be applied against the next ensuing payment of Fixed Rental then due, or, if no payment of Fixed Rent is then due, such remaining abatement shall be carried forward until fully applied. 28. Except as herein specifically modified, all of the terms, covenants and conditions of the Lease are and shall remain the same, in full force and effect, and are hereby ratified and confirmed. 29. This First Lease Modification Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. 16 30. This Lease Modification Agreement was drafted as a joint effort by counsel for each of Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this First Lease Modification Agreement as of the day and year first above written. LESSOR: 601 WEST ASSOCIATES LLC BY: SLB MANAGER LLC, A NY LIMITED LIABILITY COMPANY By: /s/ Mark Karasick ---------------------- Name: Mark Karasick Title: Managing Member LESSEE: MARTHA STEWART LIVING OMNIMEDIA, INC. By:/s/ Peter Mark ------------------ Name: Peter Mark Title: Executive Vice President 17 EXHIBIT A DESCRIPTION OF PREMISES EXCLUDED 18 EXHIBIT B DESCRIPTION OF PREMISES EXCLUDED 19 EXHIBIT C DESCRIPTION OF PREMISES EXCLUDED 20 EXHIBIT D DESCRIPTION OF PREMISES EXCLUDED EX-27.1 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the December 31, 1999 consolidated financial statements of the Company and is qualified in its entirety to such financial statements. 1,000 YEAR DEC-31-1999 JAN-1-1999 DEC-31-1999 154,749 0 41,683 0 6,163 209,895 18,709 0 281,771 67,872 0 0 0 496 198,906 281,771 0 232,314 0 209,992 0 0 (500) 22,822 (2,747) 0 0 0 0 25,569 .33 .33
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