-----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, N4tyo9EG7Afh0hP7neF6fSRkaGbmFzkoL2p+ZvMmi0yNYiIW2olPTb3BW7LC+iXE ZuaNQQMN/0At419kAtcvQw== 0000950123-01-500412.txt : 20010402 0000950123-01-500412.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950123-01-500412 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 1587133 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 y47127e10-k405.txt MARTH 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, 2000 [ ] 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 INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 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 21, 2001: $222,605,841 NUMBER OF SHARES OUTSTANDING AS OF MARCH 21, 2001: 14,669,420 SHARES OF CLASS A COMMON STOCK 33,888,375 SHARES OF CLASS B COMMON STOCK DOCUMENTS INCORPORATED BY REFERENCE 1 2 Portions of the Registrant's Proxy Statement for Its Annual Meeting of Stockholders Presently Scheduled for May 2, 2001 Are Incorporated by Reference into Part III of this Report. ================================================================================ TABLE OF CONTENTS Item 1. Business.................................................................. 3 Item 2. Properties................................................................ 11 Item 3. Legal Proceedings......................................................... 11 Item 4. Submission of Matters to a Vote of Security Holders....................... 11 Item 5. Markets for Registrant's Common Equity and Related Stockholder Matters.... 12 Item 6. Selected Financial Data................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of 12 Operations.......................................................................... Item 7A. Quantitative and Qualitative Disclosure About Market Risk................. 12 Item 8. Financial Statements and Supplementary Data............................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 12 Disclosure.......................................................................... Item 10. Directors and Executive Officers of the Registrant........................ 12 Item 11. Executive Compensation.................................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 13 Item 13. Certain Relationships and Related Transactions............................ 13 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 13 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-7 Consolidated Balance Sheets at December 31, 2000 and 1999........................... F-9 Consolidated Statements of Income for each of the three years ended December 31, 2000.......................................... F-8 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 2000.......................... F-10 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2000................................. F-11 Notes to Consolidated Financial Statements.......................................... F-12 Financial Statement Schedule: II-Valuation and Qualifying Accounts for each of the three years ended December 31, 2000............................................. F-25
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, and their respective subsidiaries. 2 3 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; changes in government regulations affecting our industries; and the receptivity of consumers to our new product introductions. 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 eight core areas: - - Home: decorating, collecting, and renovating. - - Cooking & Entertaining: recipes, techniques, and indoor and outdoor entertaining. - - Gardening: planting, landscape design, and outdoor living. - - Crafts: how-to projects and similar family activities and an appreciation of the natural world. - - Holidays: celebrating special days and special occasions. - - Keeping: homekeeping, organizing, petkeeping, clotheskeeping, restoring, and other types of domestic maintenance. - - Weddings: all aspects of planning and celebrating a wedding. - - Baby & Kids: cooking, decorating, crafts, and other projects and celebrations surrounding infants and children. Our company comprises four business segments -- Publishing, Television, Merchandising and Internet/Direct Commerce -- through which content and merchandise relating to our eight core content areas are created and distributed to consumers. Many of our creative and business personnel contribute 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 21, 2001, we had approximately 585 employees. In each of 1998, 1999 and 2000, less than five percent of our revenues was derived from customers outside the United States. 3 4 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 perform newsstand distribution services for our magazines, fulfillment services for our magazines and direct commerce 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 MSLO LLC, together with a warrant, to an affiliate of Kleiner Perkins Caufield & Byers ("KPCB"), the venture capital firm, 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 discounts, commissions and expenses, of $132.3 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 purchased 1,366,000 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 was completed on March 31, 2000. The shares were retired upon repurchase. 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-22 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, the syndicated askMartha radio program and newspaper column, and music and sound compilation CDs. 4 5 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. In 2000, advertising and circulation revenues represented approximately 60% and 40%, respectively, of our Publishing segment revenues. Martha Stewart Living. Martha Stewart Living, our flagship magazine, is the foundation of our publishing business. It was launched in 1991 as a quarterly publication with a circulation of 250,000. In 2000 we increased the frequency from ten to eleven times per year and will publish the magazine twelve times a year in 2001. Starting with the February 2001 issue, we have guaranteed our advertisers a minimum circulation of 2.15 million, up from 2.1 million in 2000. 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 1,823 pages in 2000. 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 magazine 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 and has the same fundamental 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. In 1998, we published our first special interest publication, Clotheskeeping, 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, followed by the second Martha Stewart Baby issue in October 2000. In September 2000, we also published our first Holiday-themed special interest publication, Halloween. In 2001, we intend to publish four special interest publications consisting of content from our Baby and Kids core content area, one Holiday-themed special interest publication and one special interest publication focusing on technology. 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. We print our magazines under long-term printing agreements with R. R. Donnelly. We currently purchase paper through an agreement with Time Inc. Paper for use in our magazines is 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 have typically created three Martha Stewart Living books each year and plan to create four such books in 2001. These books consist of a mixture of 5 6 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 two continuity card programs, Good Things and Crafts & Keepsakes, which consist 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 are also 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 34 titles. Of these books, 20 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 column generally appears as a one-quarter to one-half page layout that includes at least one high-quality photograph and provides a complementary forum to our longer magazine pieces and television segments. In 1999, we launched a companion column entitled askMartha Weddings, which appears in the wedding announcement section of newspapers. Both columns are syndicated through The New York Times Syndication Sales Corporation. Since 1995, when the askMartha column appeared in 57 U.S. newspapers, our newspaper presence has grown to approximately 240 U.S. and Canadian newspapers. While the revenues generated by the two columns are small, the newspapers carrying the column reach approximately 40 million readers each week, and the columns generally include a reference to our internet site or to our products or other publications, promoting product and brand awareness. 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. COMPILATION ALBUMS In July 2000, we entered into an agreement with Rhino Entertainment Company to jointly produce and distribute a series of music and sound compilation albums related to our editorial content. The first two compilations relate to our Entertaining and Holiday content. Martha Stewart Living's Spooky Scary Sounds for Halloween, a collection of sound effects for use at Halloween parties and for neighborhood trick-or-treaters, was released in September 2000, followed by Martha Stewart Living: Home for the Holidays, a compilation of traditional and contemporary holiday music. 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 6 7 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 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, O: The Oprah Magazine, Real Simple, 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 Our Publishing segment can experience fluctuations in quarterly performance. For example, Martha Stewart Living magazine was published eleven times in 2000: three issues in each of the first, second and fourth quarters and two issues in the third quarter. 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. 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 Television Food Network, weekly spots on CBS' The Early Show, internationally licensed repackaged programs, and periodic prime-time specials. MARTHA STEWART LIVING The Martha Stewart Living program is the cornerstone of our Television 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 eight 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 a one-hour weekday program in 1999. King World Productions, Inc. syndicates the program domestically under a distribution agreement that expires after the 2002-03 broadcast season. Life Network, Inc. distributes the program in Canada over its Life Network cable network. The program can currently be seen in approximately 88% of all U.S. television households. The average U.S. rating of the weekday program during calendar year 2000 was 1.55. 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 Wednesday 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 Television 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. 7 8 PRIME TIME SPECIALS Periodically, we produce prime time holiday specials which air on the CBS network. Martha Stewart's Christmas Dream, our 2000 Christmas special, was watched by over 6.6 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. INTERNATIONAL Martha Stewart Living television programs are distributed in Canada, Brazil, and Japan. Under terms of the agreements with each of our international partners, we are compensated in license fees for each episode included in the package. In 2000, foreign license fees accounted for approximately 6% of the segment's total revenues. 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 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 that is then manufactured and distributed through traditional retail channels by third parties under Martha Stewart brands. Additionally, we control and direct the creation and design of all related consumer facings, including packaging, in-store signage and advertising materials. 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, P/Kaufmann, Inc. and Fine Paints of Europe, 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. Each of our merchandising relationships generated less than 10% of our total revenues. In 2000, our revenues from Kmart constituted the substantial majority of our revenues from this segment. MARTHA STEWART EVERYDAY COLLECTIONS The Martha Stewart Everyday programs currently include Martha Stewart Everyday Home, Martha Stewart Everyday Garden, Martha Stewart Everyday Kitchen, 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. The Martha Stewart Everyday Garden program is not offered 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 program, 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 and edit all products, packaging, signage and associated collateral materials. In general, we retain all intellectual property rights related to the merchandise designs, including packaging, signage and collateral materials. 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. 8 9 Martha Stewart Everyday Home. The Martha Stewart Everyday Home collection is a line of sheets, towels, pillows, bath accessories, window treatments and kitchen textiles designed by us and manufactured by a variety of vendors, including Springs Industries, Inc. and Westpoint Stevens Inc. The collection currently consists of approximately 2,400 SKUs and 27 product lines. The agreements with Kmart and Zellers that govern the Martha Stewart Everyday Home program expire in February 2003. Martha Stewart Everyday Garden. The Martha Stewart Everyday Garden program consists of a line of outdoor furniture, grills, 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 been available only in limited quantities and at higher prices at specialty garden centers. Our agreement with Kmart governing the Martha Stewart Everyday Garden program expires in October 2003 with a three-year renewal at Kmart's option. Martha Stewart Everyday Kitchen. The Martha Stewart Everyday Kitchen program was launched in the fall of 2000. This program includes cookware, bakeware, dinnerware, flatware, and beverageware, among other items. The agreement with Kmart and Zellers that governs this program expires in October 2004 with a three-year renewal at Kmart's option. In the spring of 2001, we are scheduled to launch the Martha Stewart Everyday Keeping collection at Kmart, which will consist of organizational products relating to the pantry, closet and laundry. This program will be followed by a fall 2001 launch of Martha Stewart Everyday Decorating, which will include mirrors, picture frames and lamps. Martha Stewart Everyday Baby baby. In fall 1999, we launched the Martha Stewart Everyday Baby baby collection of nursery basics at Kmart. The agreements with Kmart and Zellers governing this collection expire 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 2005. 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 three color pallets consisting of 87 colors. The colors are offered in both traditional 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 9 10 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 products such as outdoor furniture, laundry appliances, growers bunches of cut flowers, 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. 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 eight linked content channels, each dedicated to one of our core content areas, as well as our online store and television and radio program guides. 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, magazines and television program. Our advertising sales force sells advertisements for our website individually and as part of multi-media packages. During 2000, our online store offered more than 2,100 Martha by Mail products, including marthasflowers, compared with approximately 400 offerings in any given edition of our catalog. In our continuing effort to evolve Martha by Mail from offline direct commerce to e-commerce, we provide discounts and incentives to our consumers who purchase products over the Internet. Our Internet/Direct Commerce business has grown significantly during 2000, and we have made and continue to make the personnel and technology and content development investments necessary for continued growth. As of December 2000, we had over 1,600,000 registered users of our website. Some of the segment's developments in 2000 were the launch of a recipe finder with over 1,000 searchable recipes, a garden encyclopedia containing detailed information on nearly 2,000 plants, a site-wide search function that makes all available content and products instantly searchable and marthascards, a greeting card service allowing users to send cards utilizing a select library of images from our photography archives and to create their own cards with digital photos and messages of their own. 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 addresses our current needs, and are taking appropriate steps to prepare for continued growth in this area. In 2000, over 4,000 SKU's of Martha Stewart Everyday products became available on BlueLight.com, a newly formed e-commerce company, which is accessible through marthastewart.com. In March 2001, we acquired the assets of Wedding List Holdings, Inc., a wedding gift registry service and retailer, including the internet operations of theweddinglist.com and the retail showroom assets located in New York, Boston and London. We believe these new distribution platforms will enable us to further leverage the strength of our brand in the weddings market and provide the foundation for other gift registry services in the future. 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, 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, our brand name, our service to customers and our 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 and numerous other 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 copyrights regarding our proprietary designs and editorial content on a regular basis. We regard our rights in and to our trademarks 10 11 and materials as valuable assets in the marketing of our products and vigorously seek to protect them against infringement and 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 91,889 New York, New York administrative offices; publishing offices; and sales offices 19 Newtown Turnpike, Executive and 30,523 Westport, Connecticut administrative offices for Television, including the television studio and production facilities; and sales offices for television 601 West 26th Street, Internet development 149,421 New York, New York studio, product design facilities, photography studio, test kitchens, and prop storage
The leases for these offices and facilities expire between June 2006 and June 2012, 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. 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. Additionally, in the past Martha Stewart has been the subject of legal actions relating to or that could otherwise affect our business. Should similar actions arise in the future, which actions we intend, when appropriate, to vigorously defend them in cooperation with Ms. Stewart. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ending December 31, 2000. 11 12 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.
Q4 1999 Q1 2000 Q2 2000 Q3 2000 Q4 2000 ------- ------- ------- ------- ------- High Sales Price $47.50 $30.19 $25.94 $34.81 $29.50 Low Sales Price $20.63 $21.13 $13.06 $21.06 $17.25
As of March 21, 2001, there were 4,212 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 intention of paying dividends on our common stock in the near future. 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 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 2, 2001 (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. 12 13 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. EXHIBIT
NUMBER EXHIBIT TITLE ------- ------------- 3.1 -- Registrant's Certificate of Incorporation.* 3.2 -- Registrant's By-Laws.* 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**+ 10.2.2 -- Amendment Number 2 to 1999 Stock Incentive Plan, dated as of May 11, 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 Nonqualified Class A LLC Unit/Stock Option Plan.*+ 10.6 -- Form of Employment Agreement, by and between Registrant and Martha Stewart.*+ 10.7 -- Form of Intellectual Property License and Preservation Agreement, by and between Registrant and Martha Stewart.* 10.8 -- Form of Location Rental Agreement, by and between Registrant and Martha Stewart.* 10.9 -- 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.* 10.10 -- Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.*
13 14 10.11 -- Lease, dated August, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC.* 10.11.1 -- First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc.** 10.12 -- Lease, dated as of March 6, 1996, between Newtown Group Properties Limited Partnership and Time Publishing Ventures, Inc., with amendments.* 10.13 -- Lease, dated as of August 1, 1996, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.14 -- Lease, dated as of August 14, 1997, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.15 -- License Agreement, dated January 28, 1997, by and between Martha Stewart Living Omnimedia LLC and Kmart Corporation.* 10.16 -- Severance Agreement, dated September 23, 1999, by and between Martha Stewart Living Omnimedia LLC and Sharon Patrick.*+ 10.17 -- Split-Dollar Life Insurance Agreement, dated February 28, 2001, by and among Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited Partnership.+ 99.1 -- 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.* 99.2 -- Warrant for a Percentage of the Internet Business of Martha Stewart Living Omnimedia LLC, dated July 27, 1999, issued to KPCB Holdings, Inc.*
* Incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001 ** Incorporated by reference to our 1999 Annual Report on Form 10-K, File Number 001-15395 *** Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File Number 001-15395 + Indicates management contracts and compensatory plans (b) None. 14 15 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 -------------------- Martha Stewart Executive Officer (Principal Executive Officer) /s/ Sharon Patrick President, Chief Operating Officer -------------------- Sharon Patrick and Director /s/ James Follo Chief Financial Officer -------------------- James Follo (Principal Financial and Accounting Officer) /s/ Charlotte Beers Director -------------------- Charlotte Beers /s/ L. John Doerr Director -------------------- L. John Doerr /s/ Arthur C. Martinez Director -------------------- Arthur C. Martinez /s/ Naomi O. Seligman Director -------------------- Naomi O. Seligman
Each of the above signatures is affixed as of March 29, 2001. 15 16 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 3.1 -- Registrant's Certificate of Incorporation.* 3.2 -- Registrant's By-Laws.* 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**+ 10.2.2 -- Amendment Number 2 to 1999 Stock Incentive Plan, dated as of May 11, 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 Nonqualified Class A LLC Unit/Stock Option Plan.*+ 10.6 -- Form of Employment Agreement, by and between Registrant and Martha Stewart.*+ 10.7 -- Form of Intellectual Property License and Preservation Agreement, by and between Registrant and Martha Stewart.* 10.8 -- Form of Location Rental Agreement, by and between Registrant and Martha Stewart.* 10.9 -- 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.*
16 17 10.10 -- Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.11 -- Lease, dated August, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC.* 10.11.1 -- First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc.** 10.12 -- Lease, dated as of March 6, 1996, between Newtown Group Properties Limited Partnership and Time Publishing Ventures, Inc., with amendments.* 10.13 -- Lease, dated as of August 1, 1996, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.14 -- Lease, dated as of August 14, 1997, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.15 -- License Agreement, dated January 28, 1997, by and between Martha Stewart Living Omnimedia LLC and Kmart Corporation.* 10.16 -- Severance Agreement, dated September 23, 1999, by and between Martha Stewart Living Omnimedia LLC and Sharon Patrick.*+ 10.17 -- Split-Dollar Life Insurance Agreement, dated February 28, 2001, by and among Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited Partnership.+ 99.1 -- 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.* 99.2 -- Warrant for a Percentage of the Internet Business of Martha Stewart Living Omnimedia LLC, dated July 27, 1999, issued to KPCB Holdings, Inc.*
* Incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001 ** Incorporated by reference to our 1999 Annual Report on Form 10-K, File Number 001-15395 *** Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File Number 001-15395 + Indicates management contracts and compensatory plans 17 18 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-7 Consolidated Statements of Income for each of the three years ended December 31, F-8 2000 Consolidated Balance Sheets at December 31, 2000 and 1999 F-9 Consolidated Statements of Shareholders' Equity for each of the three years ended F-10 December 31, 2000 Consolidated Statements of Cash Flows for each of the three years ended December 31, F-11 2000 Notes to Consolidated Financial Statements F-12 Financial Statement Schedule: II- Valuation and Qualifying Accounts for each of the three years ended December 31, F-25 2000
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 19 SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, (in thousands except per share data)
Compound annual growth rate 1997(4) 1998 1999 2000 1997-2000 ------- ---- ---- ---- ----------- INCOME STATEMENT DATA REVENUES Publishing $ 108,694 $ 127,020 $ 145,520 $ 179,218 18.1% Television 12,396 23,351 30,590 32,464 37.8% Merchandising 6,919 15,004 20,200 24,345 52.1% Internet/Direct Commerce 4,812 14,673 36,004 49,739 117.8% --------- --------- --------- --------- ----- TOTAL REVENUES 132,821 180,048 232,314 285,766 29.1% --------- --------- --------- --------- ----- Income from operations 16,591 27,385 22,322 31,707 24.1% --------- --------- --------- --------- ----- Net income 13,929 23,806 25,569 21,278 nm --------- --------- --------- --------- ----- Pro forma net income(1) $ 6,891 $ 12,989 $ 11,692 $ 21,278 45.6% --------- --------- --------- --------- ----- PER SHARE DATA(2) Earnings per share Basic $.24 $.44 Diluted $.24 $.43 Weighted average common shares outstanding Basic 49,588 48,678 Diluted 49,588 49,623 FINANCIAL POSITION Cash and cash equivalents $ 9,971 $ 24,578 $ 154,749 $ 127,425 Total assets 105,706 125,372 281,771 297,414 Long term debt 30,000 27,650 -- -- Shareholders' equity 13,235 36,815 199,402 196,116 OTHER FINANCIAL DATA EBITDA(3) $ 20,518 $ 32,919 $ 28,882 $ 40,797 25.7%
(1) Pro forma net income reflects the income taxes that would have been recorded had the Company been a "C" Corporation for the entire period. (2) Earnings per share for the 1999 period are calculated based upon pro forma net income divided by 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. Earnings per share for 1997 and 1998 are not presented as the Company operated as a limited liability company during those years. (3) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. The Company believes EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the media industry. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. This measure may not be comparable to similarly titled measures used by other companies. (4) See note 1 to the consolidated financial statements regarding the acquisition of certain assets and liabilities from Time Publishing Ventures, Inc. on February 3, 1997. F-2 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999 REVENUES Total revenues increased $53.5 million, or 23%, to $285.8 million for the year ended December 31, 2000, from $232.3 million for the year ended December 31, 1999. Publishing revenues increased $33.7 million, or 23%, to $179.2 million for the year ended December 31, 2000, from $145.5 million for the year ended December 31, 1999. Martha Stewart Living magazine was published eleven times in 2000, compared to ten times in 1999. Advertising revenues increased $25.1 million, due to an increase in advertising pages sold in Martha Stewart Living magazine and Martha Stewart Weddings, as well as the increased frequency of special-interest publications. In 2000, the Company published two issues of Martha Stewart Baby and one issue of Martha Stewart Holiday-Halloween 2000, compared to 1999, when one special issue was published. Circulation revenues increased $8.8 million for the year ended December 31, 2000 primarily as a result of the increased frequency of Martha Stewart Living magazine, higher average circulation from issues published in 2000 as well as increased circulation revenues from special publications. Television revenues increased $1.9 million, or 6%, to $32.5 million for the year ended December 31, 2000, from $30.6 million for the year ended December 31, 1999. The increase is due primarily to additional revenues of $2.2 million associated with higher distribution of the second half hour of our Martha Stewart Living program and additional revenues of $1.3 million earned from our cable program From Martha's Kitchen, which began broadcasting in September 1999, partially offset by reduced advertising revenues of $1.4 million on the Martha Stewart Living program due primarily to lower ratings during the year ended December 31, 2000. Merchandising revenues increased $4.1 million, or 20%, to $24.3 million for the year ended December 31, 2000, from $20.2 million for the year ended December 31, 1999, primarily as a result of increased revenues earned on our Martha Stewart Everyday products sold at Kmart. Internet/Direct Commerce revenues increased $13.7 million, or 38%, to $49.7 million for the year ended December 31, 2000, from $36.0 million for the year ended December 31, 1999, due primarily to increased merchandise sales of $10.9 million and increased advertising revenues of $2.8 million. PRODUCTION, DISTRIBUTION AND EDITORIAL Production, distribution and editorial expenses increased $31.4 million, or 25%, to $157.4 million for the year ended December 31, 2000, from $126.0 million for the year ended December 31, 1999. Internet/Direct Commerce costs increased $20.2 million due to an increase in cost of goods sold and fulfillment costs of $8.7 million resulting from higher revenues, as well as increased catalog production and distribution costs of $3.0 million resulting primarily from higher catalog circulation. In addition, costs increased $6.7 million due to our continued investment in developing and maintaining our Internet site. Publishing segment costs increased $11.1 million, reflecting the increased number of issues published in 2000, as well as the increased number of pages printed resulting from higher advertising pages sold per issue. In January 2001, the United States Postal Service enacted rate changes that increased the costs for magazine and catalog mailings an average of 9.9%. The Company's effective increase was less than the average because of the Company's efficient mailing process. Paper prices used in the publication of magazines and catalogs are driven by overall market conditions and, therefore, are difficult to predict. However, at this time, management expects the price of paper will increase only moderately in 2001. SELLING AND PROMOTION Selling and promotion expenses increased $6.6 million, or 17%, to $46.1 million for the year ended December 31, 2000, from $39.4 million for the year ended December 31, 1999. Publishing segment costs increased $5.0 million, resulting primarily from increased circulation costs incurred to support higher circulation revenues, including revenues from the publication of Martha Stewart Holiday-Halloween 2000 and two Martha Stewart Baby issues. Internet/Direct Commerce segment costs increased $1.5 million, resulting primarily from higher costs associated with higher advertising revenues. GENERAL AND ADMINISTRATIVE General and administrative expenses increased $3.5 million, or 9%, to $41.5 million for the year ended December 31, 2000, from $37.9 million for the year ended December 31, 1999. The higher expenses have been incurred primarily as a result of higher occupancy costs of $5.5 million needed to support growth in headcount, as well as increased compensation costs of $1.8 million, offset by lower professional fees of $1.9 million. Furthermore, 1999 included a contribution to an employee benefit plan of $1.2 million associated with our becoming a public company in October 1999. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $2.5 million, or 39%, to $9.1 million for the year ended December 31, 2000, from $6.6 million for the year ended December 31, 1999. The increase is attributable to higher levels of property and equipment. F-3 21 INTEREST INCOME, NET Interest income, net, was $5.6 million for the year ended December 31, 2000, compared to $0.5 million for the year ended December 31, 1999. Interest income for the year ended December 31, 2000 resulted from higher average cash balances primarily related to the proceeds received from our initial public offering in October 1999. During the year ended December 31, 1999, we had outstanding long-term debt, which resulted in interest expense in that period. Such long-term debt was fully repaid in July 1999. INCOME TAX PROVISION Income tax provision for the year ended December 31, 2000 was $16.0 million, representing a 43% effective income tax rate. Income tax benefit during the year ended December 31, 1999 was $2.7 million. This benefit arose in connection with our conversion to a "C" corporation in October 1999. At that time, the Company recognized a deferred tax benefit of $4.8 million primarily related to the recognition of net deferred tax assets recorded in accordance with the provisions of SFAS No. 109. During the period prior to the "C" corporation conversion, we operated as a limited liability company and were therefore not subject to Federal income tax on our earnings. In connection with our initial public offering in October 1999, we became a "C" corporation and accordingly our earnings became subject to income taxes from that date forward. NET INCOME Net income was $21.3 million for the year ended December 31, 2000, compared to pro forma net income of $11.7 million for the year ended December 31, 1999, as a result of the above mentioned factors. Pro forma net income reflects the income taxes that would have been recorded had the Company been a "C" corporation for the entire period. 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 and $3.6 million of 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. F-4 22 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, 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, net was $0.5 million for the year ended December 31, 1999, compared to interest expense, net 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. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $127.4 million, $154.7 million and $24.6 million at December 31, 2000, 1999 and 1998, respectively. Cash flows from operating activities were $39.5 million, $28.3 million and $17.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. Cash flows from operating activities in 2000 resulted primarily from net income of $21.3 million, depreciation and amortization of $9.1 million, tax benefits from stock option exercises of $4.2 million, increased accounts payable and accrued liabilities of $14.9 million, partially offset by increased accounts receivable of $7.3 million. Increased accounts receivable resulted primarily from higher revenues, including revenues earned from the publication of the January 2001 issue of Martha Stewart Living magazine, published in December 2000. Increased accounts payable and accrued liabilities is primarily due to liabilities resulting from increased capital expenditures in 2000, and generally higher levels of liabilities resulting from increased business volume. Cash flows from operating activities in 1999 resulted primarily from net income of $25.6 million, depreciation and amortization of $6.6 million, partially offset by deferred income tax benefit of $3.8 million. The deferred tax benefit resulted from the conversion to a "C" corporation in 1999 in connection with our initial public offering. Cash provided by financing activities for the year ended December 31, 1998 resulted primarily from net income of $23.8 million and depreciation and amortization of $5.5 million, partially offset by deferred royalty income. In 1998, we recognized as revenues $11.4 million of royalty income paid to the Company in 1997 as an advance against future royalties earned. Cash flows used in investing activities were $38.1 million, $6.3 million and $0.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. Cash flows used in investing activities in 2000 reflect a $13.3 million equity investment in BlueLight.com, an e-commerce company, and $24.7 million in capital expenditures for property and equipment. Cash flows used in investing activities in 1999 represent capital expenditures for property and equipment. Cash flows used in investing activities in 1998 represent $2.7 million in capital expenditures, partially offset by $2.4 million of proceeds received from a sale leaseback transaction. We expect capital expenditures to decline to approximately $12 million to $14 million in 2001. Cash flows used in financing activities for the year ended December 31, 2000 were $28.8 million, resulting from the repurchase of 1.366 million shares of our Class A common stock for $32.5 million from Time Publishing Ventures, Inc., partially offset by $3.7 million received from the exercise of stock options in 2000. Cash provided by financing activities was $108.2 million during the year ended December 31, 1999. In March 1999, we repaid our outstanding long-term debt to Time Publishing Ventures, totaling $27.7 million, with the proceeds received from a $15 million term loan from Bank of America and existing cash balances. The amount outstanding under the loan was repaid in July 1999 with the net proceeds of $25.0 million received from Kleiner Perkins Caufield & Byers, a venture capital firm, F-5 23 for a 5% equity investment in MSLO. 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 members of MSLO were $21.4 million in 1999. Cash flows used in investing activities for the year ended December 31, 1998 resulted from a $2.4 million repayment of long-term debt to Time Publishing Ventures and distributions to members of MSLO of $0.2 million. 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, 2000, we had no outstanding borrowings under this facility. We believe that our available cash balances together with any cash generated from operations and any funds available under existing credit facilities will be sufficient to meet our operating and recurring cash needs for foreseeable periods. We do not intend to pay any dividends in the foreseeable future. SEASONALITY AND QUARTERLY FLUCTUATIONS Several of our businesses can experience fluctuations in quarterly performance. For example, Martha Stewart Living magazine was published eleven times annually in 2000: three issues in each of the first, second and fourth quarters and two issues in the third quarter. 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. F-6 24 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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements, included on pages F-8 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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 2, 2001 F-7 25 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2000, 1999 and 1998 (in thousands except per share data)
2000 1999 1998 --------- --------- --------- REVENUES Publishing $ 179,218 $ 145,520 $ 127,020 Television 32,464 30,590 23,351 Merchandising 24,345 20,200 15,004 Internet/direct commerce 49,739 36,004 14,673 --------- --------- --------- TOTAL REVENUES 285,766 232,314 180,048 --------- --------- --------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 157,442 126,043 82,930 Selling and promotion 46,074 39,442 34,540 General and administrative 41,453 37,947 29,659 Depreciation and amortization 9,090 6,560 5,534 --------- --------- --------- TOTAL OPERATING COSTS AND EXPENSES 254,059 209,992 152,663 --------- --------- --------- INCOME FROM OPERATIONS 31,707 22,322 27,385 Interest income (expense), net 5,569 500 (2,243) --------- --------- --------- INCOME BEFORE INCOME TAXES 37,276 22,822 25,142 Income tax provision (benefit) 15,998 (2,747) 1,336 --------- --------- --------- NET INCOME $ 21,278 $ 25,569 $ 23,806 ========= ========= ========= EARNINGS PER SHARE Basic $ 0.44 Diluted $ 0.43 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 48,678 Diluted 49,623
The accompanying notes are an integral part of these consolidated financial statements. F-8 26 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (in thousands except per share data)
2000 1999 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $127,425 $154,749 Accounts receivable, net 48,993 41,683 Inventories 9,433 6,163 Deferred television production costs 3,949 2,543 Other current assets 6,013 4,757 -------- -------- Total current assets 195,813 209,895 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net 37,349 18,709 -------- -------- INTANGIBLE ASSETS, net 47,207 50,157 -------- -------- OTHER NONCURRENT ASSETS, net 17,045 3,010 -------- -------- Total assets $297,414 $281,771 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 48,340 $ 35,924 Accrued payroll and related costs 7,190 4,677 Income taxes payable 2,590 333 Current portion of deferred subscription income 28,782 26,938 -------- -------- Total current liabilities 86,902 67,872 -------- -------- DEFERRED SUBSCRIPTION INCOME 8,614 8,047 -------- -------- OTHER NONCURRENT LIABILITIES 5,782 6,450 -------- -------- Total liabilities 101,298 82,369 -------- -------- COMMITMENTS AND CONTIGENCIES SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 146 155 shares authorized:14,559 and 15,484 shares outstanding in 2000 and 1999, respectively Class B common stock, $.01 par value, 150,000 shares authorized; 33,888 and 34,127 shares outstanding in 2000 and 1999, respectively 339 341 Capital in excess of par value 168,528 193,081 Retained earnings 27,103 5,825 -------- -------- Total shareholders' equity 196,116 199,402 -------- -------- Total liabilities and shareholders' equity $297,414 $281,771 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-9 27 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 2000, 1999 and 1998 (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 January 1, 1998 $ 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 Net income -- -- -- -- -- -- 21,278 21,278 -- 441 5 -- -- 3,704 -- 3,709 Issuance of shares for employee benefit plans and stock options Repurchase and retirement of -- (1,366) (14) -- -- (32,489) -- (32,503) common stock Shares returned by majority -- -- -- (239) (2) 2 -- shareholder -- Tax benefit from exercise -- -- -- -- -- 4,230 -- 4,230 of stock options --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 2000 $ -- 14,559 $ 146 33,888 $ 339 $ 168,528 $ 27,103 $ 196,116 ========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-10 28 MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 21,278 $ 25,569 $ 23,806 Adjustments to reconcile Net income to net cash provided By operating activities Depreciation and amortization 9,090 6,560 5,534 Deferred income tax (benefit) expense (860) (3,825) 267 Tax benefit from stock option exercises 4,230 -- -- Other non cash charges -- 1,670 -- Changes in operating assets and liabilities Accounts receivable, net (7,310) (16,423) (7,314) Inventories (3,270) 359 (3,561) Other current assets (196) (1,457) 66 Deferred television production costs (1,406) 495 767 Other noncurrent assets (946) (1,087) (209) Accounts payable and accrued liabilities 14,929 12,717 4,942 Income taxes payable 2,257 -- -- Deferred subscription income 2,410 3,507 4,278 Other noncurrent liabilities (668) 219 (11,052) --------- --------- --------- 18,260 2,735 (6,282) --------- --------- --------- Net cash provided by operating activities 39,538 28,304 17,524 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (24,771) (6,298) (2,730) Investment (13,297) -- -- Proceeds from sale leaseback transaction -- -- 2,389 --------- --------- --------- Net cash used in investing activities (38,068) (6,298) (341) --------- --------- --------- 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, 3,709 132,255 -- net of expenses Repurchase and retirement of common stock (32,503) -- -- Distributions to members -- (21,440) (226) --------- --------- --------- Net cash provided by (used in) financing activities (28,794) 108,165 (2,576) --------- --------- --------- Net increase (decrease) in cash (27,324) 130,171 14,607 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 154,749 24,578 9,971 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 127,425 $ 154,749 $ 24,578 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-11 29 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") pursuant to which it purchased the rights to all Martha Stewart Living publications and television programs and the Martha by Mail business and assumed the 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 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. The Publishing segment primarily consists of the Company's magazine operations, and also those related to its book, radio, newspaper and music operations. The Television segment consists of the Company's television production operations that produce television programming that airs in syndication in the United States and on cable in the United States, Canada and certain other international markets, weekly segments on CBS's The Early Show broadcast, as well as periodic prime-time specials. The Merchandising segment consists of the Company's operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Internet/Direct Commerce segment comprises the Company's operations relating to the Martha by Mail catalog and the website marthastewart.com. A substantial portion of the Company's revenues are received from sources within the United States. 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-12 30 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. Product revenues are recorded when the goods are shipped. Royalties and television appearance fees are recorded as earned in accordance with the specific terms of relevant agreements. 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, are 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. Earnings per share Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that would occur from the exercise of common stock options outstanding. For the year ended December 31, 2000, the dilutive effect of stock options included in the determination of diluted weighted average common shares outstanding were 945,526. The antidilutive options excluded from this amount totaled 571,025 with a weighted average exercise price of $25.91. Options granted under the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC/Stock Option Plan are not included as they are not dilutive (See Note 7). F-13 31 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-14 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 4 ACCOUNTS RECEIVABLE The components of accounts receivable at December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- Advertising $ 33,645 $ 30,039 Newsstand 3,518 905 Licensing 7,172 7,321 Other 9,024 9,521 -------- -------- 53,359 47,786 Less: reserve for credits and uncollectible accounts 4,366 6,103 -------- -------- $ 48,993 $ 41,683 ======== ========
5 INVENTORIES The components of inventories at December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- Paper $ 4,151 $ 3,465 Catalog products 5,282 2,698 -------- -------- $ 9,433 $ 6,163 ======== ========
6 PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment at December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- Studios and equipment $ 6,765 $ 6,982 Furniture, fixtures and equipment 8,562 6,086 Computer hardware and software 15,628 8,770 Leasehold improvements 19,424 4,502 -------- -------- 50,379 26,340 Less: accumulated depreciation and amortization 13,030 7,631 -------- -------- $ 37,349 $ 18,709 ======== ========
Depreciation expense was $6,140, $3,610, and $2,537 for the years ended December 31, 2000, 1999 and 1998, respectively. Included in property, plant and equipment are assets which were acquired under capital leases in the amount of $7,781 and $7,781, with accumulated amortization of $3,362 and $931 at December 31, 2000 and 1999, respectively. Depreciation expense associated with assets under capital leases is included in total depreciation expense. F-15 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 7 EMPLOYEE BENEFIT PLANS Retirement Plans The Company established a 401(k) retirement plan effective July 1, 1997, available to substantially all employees. 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 ($10.5 in 2000 and $10 in 1999 and 1998), whichever is less. The Company matches 50% 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 $779, $385, and $259 for the years ended December 31, 2000, 1999 and 1998, 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. In connection with the merger with MSLO in October 1999, the outstanding options for approximately 509,841 LLC units were converted into options to purchase 1,995,740 shares of Class A common stock of the Company. The Company has an agreement with the Martha Stewart Family Limited Partnership whereby it periodically returns to the Company on a net treasury basis shares of Class B common stock owned by it or its affiliates in amounts corresponding to the number of these options exercised during the relevant period. In 2000, 238,456 shares of Class B common stock were returned under this agreement. Accordingly, options outstanding under this plan are not dilutive. Options granted under the plan vested 10% at December 31, 1998, 10% at December 31, 1999, and 20% at December 31, 2000 and generally vest 20% and 40% on December 31 of each of the next two years. The status of this stock option plan is summarized as follows:
Weighted Number of average shares exercise price --------- -------------- Outstanding as of October 22, 1999 1,995,740 $ 0.63 Exercised (27,463) $ 0.60 --------- ------ Outstanding as of December 31, 1999 1,968,277 $ 0.63 Exercised (216,069) $ 0.65 Cancelled (77,219) $ 0.60 --------- ------ Outstanding as of December 31, 2000 1,674,989 $ 0.63 ========= ====== Options exercisable at: December 31, 1999 647,815 $ 0.63 December 31, 2000 753,545 $ 0.62
F-16 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 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 on the date of grant. Employee stock options vest ratably on each of the first four anniversaries of the grant date. Non-employee director options vest on the first anniversary of the date of the relevant grant. The term of the options granted under these plans are ten years. The status of these stock option plans is summarized as follows:
Weighted Number of average shares exercise price --------- -------------- Granted 5,131,840 $ 17.65 Exercised -- -- Cancelled (1,800) 18.00 --------- ------ Outstanding as of December 31, 1999 5,130,040 17.65 Granted 2,011,753 18.23 Exercised (223,717) 16.16 Cancelled (415,305) 17.81 --------- ------ Outstanding as of December 31, 2000 6,502,771 $ 17.87 ========= ======= Options exercisable at: December 31, 1999 -- -- December 31, 2000 1,059,243 $ 17.97
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:
2000 1999 ---- ---- Risk-free interest rates 6.23% 5.78% Dividend yields zero Zero Expected volatility 46% 25% Expected option life 6 years 6 years Fair value of options granted $9.71 $6.63
F-17 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 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, 2000, 1999, and 1998 were as follows:
2000 1999 1998 ---- ---- ---- NET INCOME As reported $21,278 $25,569 $23,806 Pro forma 16,205 24,569 23,753 Pro forma earnings per share, $0.33 -- -- diluted
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 on October 22, 1999, 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 respective tax returns. Effective with the conversion from a limited liability company, 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, 2000, 1999 and 1998:
2000 1999 1998 -------- -------- -------- CURRENT INCOME TAXES Federal $ 12,292 $ 60 -- State and local 4,190 555 $ 578 Foreign 376 463 491 -------- -------- -------- TOTAL CURRENT INCOME TAX EXPENSE 16,858 1,078 1,069 -------- -------- -------- DEFERRED INCOME TAXES (BENEFIT) Federal (640) (2,900) -- State and local (220) (925) 267 TOTAL DEFERRED INCOME TAX EXPENSE (BENEFIT) (860) (3,825) 267 -------- -------- -------- INCOME TAX PROVISION (BENEFIT) $ 15,998 $ (2,747) $ 1,336 ======== ======== ========
F-18 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) A reconciliation from the Federal income tax provision at the statutory rate to the effective rate for the year ended December 31, 2000 is as follows: Computed tax at the federal statutory rate of 35% $ 13,047 State income taxes, net of federal benefit 2,581 Non-deductible goodwill amortization 965 Non-deductible expense 315 Non-taxable interest income (910) -------- Provision for income taxes $ 15,998 ======== Effective tax rate 42.9% ========
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 in 1999, 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 and liabilities as of December 31, 2000 and 1999 are as follows:
2000 1999 ------- ------- DEFERRED TAX ASSETS: Inventory obsolescence reserves $ 1,457 $ 1,076 Provision for doubtful accounts 1,087 815 Accrued rent 949 382 Reserve for newsstand returns 743 405 Depreciation and amortization -- 435 Accrued compensation 603 237 Other 428 650 ------- ------- TOTAL DEFERRED TAX ASSETS 5,267 4,000 ------- ------- DEFERRED TAX LIABILITIES Depreciation and amortization (407) -- ------- ------- TOTAL DEFERRED TAX LIABILITIES (407) -- ------- ------- NET DEFERRED INCOME TAX ASSET $ 4,860 $ 4,000 ======= =======
9 RELATED PARTY TRANSACTIONS The Company has 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 $34,749, $26,812, and $26,595 in 2000, 1999, and 1998, respectively, including $34,149, $26,205, and $26,010 of paper purchases, respectively. 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 $21,462, $16,063 and $11,264 in 2000, 1999 and 1998, respectively. F-19 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 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 $2,091, $1,658, and $1,384 in 2000, 1999, and 1998, respectively. The aggregate amounts due to Time included in accounts payable and accrued liabilities were approximately $11,628 and $3,682 as of December 31, 2000 and 1999, respectively. Aggregate amount due from Time included in accounts receivable, net was $1.4 million as of December 31, 2000. Oxmoor House Inc., an affiliate of Time, currently publishes the Martha Stewart Living series of books. The Company has 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 $2,327, $2,531, and $1,995, in 2000, 1999, and 1998, 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, $2,000, and $1,500 in 2000, 1999, and 1998, respectively. In March 2000, the Company repurchased 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. The Company used the services of a law firm of which Martha Stewart's son-in-law is a partner. The Company paid an aggregate of approximately $72, $166, and $92 in fees and expenses in respect of such services in 2000, 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 LIBOR plus 1% per annum. The agreement also requires the Company to pay a commitment fee equal to one-quarter of 1% per annum of the unused available borrowings. As of December 31, 2000, the Company did not have any amounts outstanding under this agreement. F-20 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 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 $8,927, $3,341, and $4,100 for the years ended December 31, 2000, 1999, and 1998, respectively. The following is a schedule of future minimum payments under capitalized and operating leases at December 31, 2000:
Capitalized Operating Leases Leases ----------- --------- 2001 $ 2,649 $ 7,645 2002 2,406 7,763 2003 483 7,877 2004 - 8,040 2005 - 8,239 Thereafter - 34,205 5,538 $ 73,769 Total minimum lease payments ======== Imputed interest (580) ------- Present value of minimum capitalized lease payments 4,958 Current portion (2,243) ------- Long-term capitalized lease obligation $ 2,715 =======
The Company has outstanding letters of credit for $ 2,252 as security for certain leases as of December 31, 2000. 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 and accrued expenses. The carrying amount of these accounts approximates fair value. Accumulated amortization of intangible assets was $11,802 and $8,851 at December 31, 2000 and 1999, respectively. Amortization expense was $2,950, $2,950, and $2,997 for the years ended December 31, 2000, 1999, and 1998, respectively. Advertising expense was $16,276, $14,541, and $11,564 for the years ended December 31, 2000, 1999, and 1998, respectively. Interest paid was $598, $2,705, and $3,962 for the years ended December 31, 2000, 1999, and 1998, respectively. Income taxes paid were $10,372, $716 and $502 for the years ended December 31, 2000, 1999, and 1998, respectively. F-21 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) Included in other noncurrent assets at December 31, 2000 is an investment of approximately $13.3 million in BlueLight.com, an e-commerce company, representing an ownership interest of approximately 5%. The investment is carried at cost. In connection with its investment, the Company has the right to put its BlueLight.com investment to Kmart Corporation for the amount of its initial investment during a nine-month period beginning in March 2002. The exercise of this right is conditioned upon another minority investor in BlueLight.com exercising its similar put right during this period. Kmart Corporation is a majority stockholder of BlueLight.com. 13 INDUSTRY SEGMENTS The Company's industry segments are discussed in Note 1. Segment information for the years ended December 31, 2000, 1999, and 1998 is as follows:
Internet/Direct Corporate Publishing Television Merchandising Commerce Charges Consolidated ---------- ---------- ------------- -------- --------------- ------------ 2000 Revenues $179,218 $ 32,464 $ 24,345 $ 49,739 -- $285,766 Income (loss) from operations 66,266 5,748 24,160 (25,659) (38,808) 31,707 Depreciation and amortization -- 1,874 -- 192 7,024 9,090 Total assets 30,662 21,850 8,543 12,871 223,488 297,414 Capital expenditures -- 702 -- 1,873 22,196 24,771 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
14 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting standards for derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. We have determined the impact of initial adoption will not have a material impact on the results of our operations or financial position. The Company is required to adopt SFAS 133 in the first quarter of fiscal 2001. F-22 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) In June 2000, FASB issued Statement of Financial Accounting Standard No. 139, "Rescission of FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89 and 121" ("SFAS 139"). FASB 139rescinds FASB No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films." An entity that previously was subject to the requirements of Statement 53 is required to follow the guidance in AICPA Statement of Position 00-2, "Accounting by Producers and Distributors of Films." The adoption of this statement did not have a material impact on our financial position or results of operations. 15 EARNINGS PER SHARE (UNAUDITED) The Company became a "C" Corporation on October 22, 1999. Earnings per share for the years ended December 31, 1999 and 1998 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, net income for the periods prior to October 22, 1999 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 of 1999. Pro forma earnings per share for the year ended December 31, 1999 are calculated based upon the weighted average number of common shares outstanding during the year. Adjusted pro forma earnings per share for the year ended December 31, 1999 is 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 the year 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 - -------------------------------------------- --------- Net income $ 25,569 Pro forma adjustment to income tax provision 13,877 Pro forma net income 11,692 Pro forma Earnings per share, basic and diluted $ .28 -------- Weighted average common shares outstanding, basic and diluted 41,720 -------- Adjusted pro forma Earnings per share, basic and diluted $ .24 -------- Weighted average common shares outstanding, basic and diluted 49,588 --------
F-23 41 NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) 16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Year ended December 31, 2000 Quarter Quarter Quarter Quarter Total - ---------------------------- ------- ------- ------- ------- ----- Revenues $ 69,146 $ 69,193 $ 61,889 $ 85,538 $285,766 Income from operations 9,347 8,543 5,200 8,617 31,707 Net income 5,581 5,952 3,820 5,925 21,278 EARNINGS PER SHARE Basic $ .11 $ .12 $ .08 $ .12 $ .44 Diluted $ .11 $ .12 $ .08 $ .12 $ .43 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 49,616 48,277 48,365 48,473 48,678 Diluted 51,164 48,704 50,741 49,467 49,623 STOCK PRICE PER SHARE(4) High $ 30.19 $ 25.94 $ 34.81 $ 29.50 Low $ 21.13 $ 13.06 $ 21.06 $ 17.25
First Second Third Fourth Year ended December 31, 1999 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 PRICES PER SHARE High -- -- -- $ 47.50 Low -- -- -- $ 20.63
(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 6, 2001, was 4,156 and one, respectively. F-24 42 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, 2000......................................... $1,937 $1,196 $ 934 $2,199 1999......................................... 1,202 1,572 837 1,937 1998......................................... 1,123 293 214 1,202 RESERVE FOR AUDIENCE UNDER DELIVERY: YEARS ENDED DECEMBER 31, 2000......................................... $4,166 $(846) $1,153 $2,167 1999......................................... 4,803 2,159 2,796 4,166 1998......................................... 1,434 5,724 2,355 4,803
F-25 EX-10.17 2 y47127ex10-17.txt SPLIT-DOLLAR LIFE INSURANCE AGREEMENT 1 Exhibit 10.17 SPLIT-DOLLAR AGREEMENT THIS AGREEMENT made and entered into as of this 28th day of February, 2001, by and among Martha Stewart Living Omnimedia, Inc., a Delaware corporation, having an address of 11 West 42nd St., New York, New York 10036 ("Corporation"), Martha Stewart, an individual residing in the state of Connecticut ("Employee"), and The Martha Stewart Family Limited Partnership, a Connecticut limited partnership ("Owner"). WITNESSETH THAT: WHEREAS, the Employee is employed by the Corporation; and WHEREAS, the Employee wishes to provide life insurance protection in the event of her death under two policies of life insurance insuring her life (each a "Policy" and collectively, the "Policies"), which are described in attached Exhibit A and by this reference made a part of this Agreement, and which are being issued by Security Life of Denver and Metropolitan Life, respectively (each an "Insurer" and collectively the "Insurers"); and WHEREAS, the Corporation is willing to pay a portion of the premiums due on each Policy as an additional employment benefit for the Employee, on the terms and conditions set forth in this Agreement; and WHEREAS, Owner is the owner of each Policy and, as such, possesses all incidents of ownership in and to each Policy; and WHEREAS, the Corporation wishes to have the Policies collaterally assigned to it by the Owner to secure the repayment of the amounts which the Corporation will pay toward policy premiums; and WHEREAS, the parties intend that by these collateral assignments the Corporation shall receive only the right to its repayment, with the Owner retaining all other ownership rights in a Policy, as specified herein; NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement, the parties agree as follows: 1. PURCHASE OF POLICY. The Owner will purchase a Policy from each Insurer in the face amount of THIRTEEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($13,500,000). The parties agree that they will take all necessary action to cause each Insurer to issue a Policy, and shall take any further action necessary to cause each Policy to conform to the provisions of this Agreement. The parties agree that each Policy shall be subject to this Agreement and the collateral assignments filed with the Insurers relating to the Policies. 2. OWNERSHIP OF POLICIES. a. The Owner shall be the sole and absolute owner of each Policy, and may exercise all ownership rights granted to the owner thereof by the terms of each Policy, except as may otherwise be provided in this Agreement. b. Pursuant to this Agreement and the concomitant collateral assignments, the parties intend that the Owner shall retain all rights which each Policy grants to its owner and that the Corporation shall only be entitled to be repaid the amounts set forth below. Specifically, but without limitation, the Corporation shall neither have nor exercise any right as collateral assignee of a Policy which could in any way defeat or impair the Owner's right to receive the cash surrender value or the death proceeds of a Policy in excess of the amount due the Corporation with respect to that Policy hereunder. All provisions of this Agreement and the collateral assignments shall be so construed. 3. POLICY DIVIDENDS. In accordance with the election made by the Owner, any dividend declared on a Policy shall be applied to purchase paid-up additional insurance on the life of the Employee. The parties agree that the dividend election provisions of a Policy shall conform to the provisions of this Agreement. 4. PAYMENT OF PREMIUMS. a. Thirty (30) days prior to the due date of a premium on a Policy (or thirty (30) days prior to the scheduled payment date for any scheduled premium on a Policy as the case may be), the Corporation shall notify the Owner of the exact amount F-26 2 due from the Owner under this Agreement with respect to that Policy. For each Policy, the amount due from the Owner shall equal the annual cost of current life insurance protection on the life of the Employee provided under that Policy, calculated using the lower of (1) the Table 2001 rate, set forth in Internal Revenue Service Notice 2001-10 (or the corresponding applicable provision of any future Internal Revenue Service authority), or (2) the Insurer's current published premium rate for annually renewable term insurance for standard risks. Either the Owner, or the Employee on behalf of the Owner, shall pay the required contribution to the Corporation prior to a premium due date. If neither the Employee nor the Owner timely pays a contribution, the Corporation, in its sole discretion, may elect to pay the Owner's portion of a premium, which shall be recovered by the Corporation as provided in this Agreement. Any contribution towards a premium payment actually paid by the Owner or the Employee shall be considered to be a payment by the Owner or the Employee of a portion (equal to that contribution) of that premium for purposes of calculating the amount to be repaid the Corporation under Sections 6, 7 and 9 of this Agreement. b. While this Agreement is in force, the premiums on both Policies shall total ONE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND SIXTY-NINE DOLLARS ($1,174,069) annually. On or before the due date of each Policy premium (or the date of the premium payment for any scheduled policy premium as the case may be), or within the grace period provided therein, the Corporation shall pay the full amount of the premium to the Insurer, and shall, upon request, promptly furnish the Owner evidence of timely payment of that premium. Subject to the contribution provided above, the Corporation shall pay all premiums due on the Policy (or all payments for scheduled policy premiums as the case may be) while this Agreement is in force. The Corporation shall annually furnish the Employee a statement of the amount of income reportable by the Employee, if any, for federal and state income tax purposes as a result of the insurance protection provided the Owner as the policy beneficiary. 5. RESTRICTED COLLATERAL ASSIGNMENT. To secure the repayment to the Corporation of the amount to which it is entitled under this Agreement with respect to a Policy, the Owner has assigned, as of the date of this Agreement, that Policy to the Corporation as collateral. This collateral assignment provides that the sole right of the Corporation is to be repaid that amount. This repayment shall be made (1) from the cash surrender value of that Policy (as defined therein) if this Agreement is terminated or if the Owner surrenders or cancels that Policy, or (2) from the death proceeds of that Policy if the Employee dies while that Policy and this Agreement remain in force. In no event shall the Corporation have any right to borrow against or make withdrawals from a Policy, to surrender or cancel a Policy, or to take any other action which would impair or defeat the rights of the Owner in and to a Policy. The collateral assignment of a Policy to the Corporation shall not be terminated, altered or amended by the Owner while this Agreement is in effect, and the Corporation shall not assign its interest under a collateral assignment to anyone other than the Owner or the Owner's nominee(s). The parties agree to take all action necessary to cause the collateral assignments to conform to the provisions of this Agreement. 6. LIMITATIONS ON OWNER'S RIGHTS IN POLICY. a. The Owner shall take no action with respect to a Policy which would in any way compromise or jeopardize the Corporation's right to be repaid the amounts it has paid toward premiums on that Policy while this Agreement is in effect. b. Subject to the terms of this Agreement, the Owner may pledge or assign a Policy to secure a loan from the Insurer or from a third party, in an amount not to exceed the cash surrender value of that Policy (as defined therein) as of the date to which premiums have been paid less the aggregate amounts paid toward premiums on that Policy by the Corporation. Interest charges on such a loan shall be the responsibility of and be paid by the Owner. c. The Owner shall have the sole right to surrender or cancel a Policy, and to receive the full cash surrender value of that Policy directly from the Insurer. Nonetheless, upon the surrender or cancellation of that Policy, the Corporation shall have the unqualified right to receive a portion of the cash surrender value of that Policy equal to the lesser of (1) the aggregate amount of premiums paid by the Corporation with respect to that Policy or (2) the then cash surrender value of that Policy. Immediately upon receipt of the cash value of that Policy, the Owner shall pay to the Corporation the portion of cash value to which the Corporation is entitled and shall retain the balance, if any. Upon that receipt and payment, that Policy shall no longer be subject to this Agreement, and when both Policies are no longer subject to this Agreement, this Agreement shall terminate. 7. COLLECTION OF DEATH PROCEEDS. a. Upon the death of the Employee, the Corporation and the Owner shall cooperate to take whatever action is necessary to collect the death benefits provided under the Policies. When those benefits have been collected and paid as provided in this Agreement, this Agreement shall terminate. F-27 3 b. Upon the death of the Employee, the Corporation shall have the unqualified right to receive a portion of the death benefit of each Policy that remains subject to this Agreement equal to the aggregate amount of the premiums paid by the Corporation with respect to that Policy. The balance of the death benefit, if any, shall be paid directly to the Owner, in the manner and in the amount or amounts provided in the beneficiary designation provision of that Policy. In no event shall the amount payable to the Corporation exceed the proceeds payable at the death of the Employee. No amount shall be paid from a Policy's death benefit to the Owner until the full amount due the Corporation with respect to that Policy has been paid. The parties agree that the beneficiary designation provision of each Policy shall conform to the provisions of this Agreement. c. Notwithstanding any provision to the contrary, in the event that, for any reason whatsoever, no death benefit is payable under a Policy upon the death of the Employee and in lieu thereof the Insurer refunds all or any part of the premiums paid for that Policy, the Corporation and the Owner shall have the unqualified right to share that refund based on their respective cumulative contributions to that Policy. 8. TERMINATION OF THE AGREEMENT DURING THE EMPLOYEE'S LIFETIME. a. This Agreement shall terminate, during the Employee's lifetime, without notice, upon the occurrence of any of the following events: (1) the second day of the sixteenth year of the Policies; (2) total cessation of the Corporation's business; (3) bankruptcy, receivership or dissolution of the Corporation; or (4) failure of both the Employee and the Owner to pay timely to the Corporation the Owner's portion of a premium when due, if any, unless the Corporation elects to make that payment on behalf of the Employee, as provided under this Agreement. b. In addition, the Owner may terminate this Agreement, while no premium under a Policy is overdue, by written notice to the other parties. In no event shall the Corporation have any right to terminate this Agreement. A termination shall be effective as of the date of the notice. 9. DISPOSITION OF THE POLICIES ON TERMINATION OF THE AGREEMENT DURING THE EMPLOYEE'S LIFETIME. a. For sixty (60) days after the date of the termination of this Agreement during the Employee's lifetime, the Owner shall have the option of obtaining the release of the collateral assignment of a Policy to the Corporation. To obtain the release, the Owner shall repay to the Corporation the lesser of (1) the aggregate premium payments made by the Corporation with respect to that Policy or (2) the then cash surrender value of that Policy. After that repayment, the Corporation shall release the collateral assignment of that Policy, by the execution and delivery of an appropriate instrument of release. b. If the Owner fails to exercise that option within that sixty (60) day period, then, at the request of the Corporation, the Owner shall execute any documentation required by the Insurer to transfer the Owner's interest in that Policy to the Corporation. Alternatively the Corporation may enforce, pursuant to the collateral assignment of that Policy, the Corporation's right to be repaid an amount equal to the aggregate premiums paid by the Corporation on that Policy out of its cash surrender value; provided that if the cash surrender value of that Policy exceeds the amount due the Corporation, that excess shall be paid to the Owner. Thereafter, neither the Owner nor the Owner's successors, assigns or beneficiaries shall have any further interest in and to that Policy, either under the terms thereof or under this Agreement. 10. INSURER NOT A PARTY. An Insurer shall be fully discharged from its obligations under a Policy by payment of that Policy's death benefit to the beneficiary or beneficiaries named in that Policy, subject to its terms and conditions. In no event shall the Insurer be considered a party to this Agreement, or any modification or amendment. No provision of this Agreement, or any modification or amendment, shall enlarge, change, vary, or in any other way affect the obligations of an Insurer as expressly provided in a Policy, except as the provisions of this Agreement are made a part of that Policy by the collateral assignment executed by the Owner and filed with the Insurer. 11. NAMED FIDUCIARY, DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. a. The Corporation is designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with this Agreement. F-28 4 b. (1) Claim. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Agreement ("Claimant") may file a written request for such benefit with the Corporation, setting forth his or her claim. The request must be addressed to the Chief Financial Officer of the Corporation at its then principal place of business. (2) Claim Decision. Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Corporation may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Corporation shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of this Agreement on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under subsection (3) and for review under subsection (4) below. (3) Request for Review. With sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Secretary of the Corporation review the determination of the Corporation. The request must be addressed to the Secretary of the Corporation, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the Corporation's determination by the Secretary of the Corporation within such sixty (60) day period, he or she shall be barred and estopped from challenging the Corporation's determination. (4) Review of Decision. Within sixty (60) days after the Secretary's receipt of a request for review, he or she will review the Corporation's determination. After considering all materials presented by the Claimant, the Secretary will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 12. AMENDMENT. This Agreement may not be amended, altered or modified, except by a written instrument signed by the parties hereto, or their respective successors or assigns, and may not be otherwise terminated except as provided herein. 13. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns, and the Employee, the Owner, and their respective successors, assigns, heirs, executors, administrators and beneficiaries. 14. NOTICE. Any notice, consent or demand required or permitted to be given under this Agreement shall be in writing, and shall be signed by the party giving or making the same. If any notice, consent or demand is mailed to a party, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Corporation. The date of mailing shall be deemed the date of notice, consent or demand. 15. GOVERNING LAW. This Agreement, and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of New York. F-29 5 The parties have executed this Agreement as of the day and year first above written. MARTHA STEWART LIVING OMNIMEDIA, INC. By: /s/ James Follo ------------------------------------------ James Follo, Chief Financial Officer /s/ Martha Stewart Martha Stewart MARTHA STEWART FAMILY LIMITED PARTNERSHIP By: /s/ Martha Stewart ------------------------------------------ Martha Stewart, General Partner F-30 6 EXHIBIT A The following life insurance policies are subject to the attached Split-Dollar Agreement: POLICY 1 Insurer: Standard Life of Denver Insured: Martha Stewart Policy Number: 610024604 Face Amount: $13,500,000 Dividend Option: purchase additional paid-up insurance Date of Issue: February 28, 2001 POLICY 2 Insurer: Metropolitan Life Insured: Martha Stewart Policy Number: 201970167UV Face Amount: $13,500,000 Dividend Option: purchase additional paid-up insurance Date of Issue: February 28, 2001 F-31 7 EXHIBIT B - Restricted Collateral Assignment (Policy 1) Reference is made to the Agreement among Martha Stewart Living Omnimedia, Inc., a Delaware corporation, having an address of 11 West 42nd St., New York, New York 10036 ("Corporation"), Martha Stewart, an individual residing in the State of Connecticut ("Employee"), and Martha Stewart Family Limited Partnership, a Connecticut limited partnership ("Owner") (the "Agreement") executed at the same time as this Restricted Collateral Assignment. All definitions in this Restricted Collateral Assignment shall have the same meaning as in the Agreement. To: Standard Life of Denver Re: Insured: MARTHA STEWART Policy Number: 610024604 1. The Owner of the Policy hereby assigns to the Corporation as collateral security for the return of its aggregate premium payments under the Agreement: (a) On any termination of the Agreement or surrender of the Policy, a portion of the Policy's cash surrender value equal to the lesser of - (1) The cash surrender value; or (2) The Corporation's aggregate premium payments under the Agreement. (b) On the death of the Insured, a portion of the Policy's death benefit equal to the Corporation's aggregate premium payments under the Agreement 2. This is a limited assignment and confers on the Corporation none of the Policy's incidents of ownership, all of which are retained by the Owner as provided in the plan. 3. The Insurer shall be bound only by the provisions of and endorsements on the Policy (including this Restricted Collateral Assignment), and payments made or actions taken by it in accordance therewith shall fully discharge it from all claims, suits and demands of all persons whatsoever. 4. This Restricted Collateral Assignment may be amended at any time and from time to time by the mutual written agreement of the parties. The Owner has signed this Restricted Collateral Assignment this 28th day of February, 2001. MARTHA STEWART FAMILY LIMITED PARTNERSHIP By: /s/ Martha Stewart ------------------------------------------ Martha Stewart, General Partner F-32 8 EXHIBIT B - Restricted Collateral Assignment (Policy 2) Reference is made to the Agreement among Martha Stewart Living Omnimedia, Inc., a Delaware corporation, having an address of 11 West 42nd St., New York, New York 10036 ("Corporation"), Martha Stewart, an individual residing in the State of Connecticut ("Employee"), and Martha Stewart Family Limited Partnership, a Connecticut limited partnership ("Owner") (the "Agreement") executed at the same time as this Restricted Collateral Assignment. All definitions in this Restricted Collateral Assignment shall have the same meaning as in the Agreement. To: Metropolitan Life Re: Insured: MARTHA STEWART Policy Number: 201970167UV 1. The Owner of the Policy hereby assigns to the Corporation as collateral security for the return of its aggregate premium payments under the Agreement: (a) On any termination of the Agreement or surrender of the Policy, a portion of the Policy's cash surrender value equal to the lesser of - (3) The cash surrender value; or (4) The Corporation's aggregate premium payments under the Agreement. (b) On the death of the Insured, a portion of the Policy's death benefit equal to the Corporation's aggregate premium payments under the Agreement 2. This is a limited assignment and confers on the Corporation none of the Policy's incidents of ownership, all of which are retained by the Owner as provided in the plan. 3. The Insurer shall be bound only by the provisions of and endorsements on the Policy (including this Restricted Collateral Assignment), and payments made or actions taken by it in accordance therewith shall fully discharge it from all claims, suits and demands of all persons whatsoever. 4. This Restricted Collateral Assignment may be amended at any time and from time to time by the mutual written agreement of the parties. The Owner has signed this Restricted Collateral Assignment this 28th day of February, 2001. MARTHA STEWART FAMILY LIMITED PARTNERSHIP By: /s/ Martha Stewart ------------------------------------------ Martha Stewart, General Partner F-33 -----END PRIVACY-ENHANCED MESSAGE-----