MARTHA STEWART LIVING OMNIMEDIA, INC.

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 þ No o

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. o

In this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “MSO” and the “Company” refer to Martha Stewart Living Omnimedia, Inc. and, unless the context requires otherwise, Martha Stewart Living Omnimedia LLC (“MSLO LLC”), the legal entity that prior to October 22, 1999, operated many of the businesses we now operate, and their respective subsidiaries.

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 current 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; shifts in our own business strategies; 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; operational or financial problems at any of our contractual business partners; the receptivity of consumers to our new product introductions; unexpected transitional difficulties at our new direct commerce fulfillment partner; unexpected developments in Kmart Corporation’s Chapter 11 proceedings; and changes in government regulations affecting our industries.

We are an integrated content and commerce company that creates “how-to” content and domestic 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 generally 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. While each segment has dedicated personnel, 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 18, 2002, we had approximately 610 employees. Our revenues from foreign sources were $9.8 million, $8.3 million and $6.2 million in 2001, 2000 and 1999, respectively. Substantially all of our assets are located within the United States.

Martha Stewart published her first book, Entertaining, in 1982. Over the next eight years she became a well-known authority on the domestic arts, authoring eight more books 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 contributed cash to MSLO LLC, each in exchange for MSLO LLC equity. In February 1997, MSLO LLC purchased all TPV’s assets primarily relating to its Martha Stewart-related businesses 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 would provide newsstand distribution services for our magazines, provide 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. On March 30, 1999, we satisfied all our obligations under the TPV Note with cash on hand and borrowings under a term loan.

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.

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-24 of this Report.

Our Publishing segment currently consists of our operations relating to magazines, books, radio, newspapers, and music. In 2001, revenues from magazine advertising and circulation represented 60% and 38% of the segment’s revenues, respectively.

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 2001 we increased the frequency from eleven to twelve times per year. 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 1,790 pages in 2001.

Martha Stewart Living appeals primarily to the college-educated woman between the ages of 25 and 54 who owns her principal residence. 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 the substantial majority of our magazine 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. Martha Stewart Weddings targets the upscale bride and serves as an important vehicle for introducing young women to our brands. Martha Stewart Weddings is sold primarily through newsstand distribution.

Special Interest Publications. Over the past few years we have published special interest magazine editions, beginning with one in 1998, growing to seven publications in 2001. Our special issue schedule in 2001 consisted of two issues of Martha Stewart Baby, two issues of Martha Stewart Kids, Martha Stewart Holiday Cookies, At Home with Technology, and Martha Stewart Everyday Garden magazine which was custom published for Kmart Corporation. We are scheduled to publish seven special issue editions in 2002. 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, and explore potential for new standalone titles. For instance, Martha Stewart Kids is scheduled to be published four times in 2002. Our special interest publications can be either sponsored by a single advertiser or multiple advertisers and are sometimes sold at newsstands and sometimes distributed to subscribers with issues of Martha Stewart Living.

International. Beginning in December 2001, Martha Stewart Japan, Inc., a Japanese publishing company in which we own a minority interest, began publication of a Japanese language magazine entitled Martha Stewart Martha. In exchange for royalties based on advertising and circulation sales of the magazine,

Magazine Production, Distribution and Fulfillment. We print our domestic 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 domestic 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 2004 issue. 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. Printing and distribution for the Japanese edition of our magazine is handled by third parties through our Japanese licensee.

We create two different types of books: Martha Stewart Living books and Martha Stewart-authored books. Our current book library comprises 38 titles. Of these books, 24 are Martha Stewart Living books, and 14 are Martha Stewart-authored books. We own the copyrights to all these books.

Martha Stewart Living Books. We have typically created three Martha Stewart Living books each year and plan to create 4 such books in 2002. These books consist of a mixture of content previously published in our magazines and original material. The hardcover versions of each of these titles are sold through direct marketing methods to consumers, including Martha Stewart Living readers and regular craft and cookbook buyers, and paperback editions are sold at retail book stores. In conjunction with the Martha Stewart Living book program, we also market a continuity card program, Good Things, which consists 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 are 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 have been distributed through other retail channels by Clarkson N. Potter, a division of Random House, a subsidiary of Bertelsmann AG, under various agreements.

Martha Stewart Books. Under an agreement with Clarkson N. Potter, we create completely original Martha Stewart-authored books, and are obligated to deliver one more such book. Most recently, we released 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. Following expiration of our agreement with Clarkson N. Potter, we intend to continue to publish such books through a new agreement with Clarkson N. Potter or through another publisher.

Our askMartha syndicated newspaper columns appear weekly in over 220 newspapers in North America. Our askMartha syndicated radio program airs for ninety seconds five days a week on over 360 radio stations in North America, covering over 91% of United States markets. In general, both the column and the radio program provide informative how-to content in response to particular questions posed by Martha Stewart consumers. The newspaper columns are syndicated by The New York Times Syndication Sales Corporation which pays us a percentage of the syndication revenues they receive. The radio program is syndicated by Westwood One Radio, Inc. with which we share advertising revenues generated by sales of advertising for the program generated by Westwood One and our advertising sales force. While the revenues contributed by these businesses are not as significant as those contributed by most of our other media activities, we reach a broader audience and demographic through these two vehicles than through any of our other media enterprises. They therefore provide valuable no-cost brand promotion outside our core audience.

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. To date, we have

Publishing is a highly competitive business. Our magazines, books and related publishing products compete with other mass media and many other types of leisure-time activities. Overall competitive factors in this segment include price, editorial content and editorial and aesthetic quality. Competition for advertising dollars in magazine operations is primarily based on advertising rates, editorial and aesthetic quality, the desirability of the magazine’s demographic, reader response to advertisers’ products and services and effectiveness of the advertising sales staff. Martha Stewart Living competes for advertising dollars in the women’s service magazine category, including Ladies’ Home Journal, Rosie 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. Our special interest issues can compete with a variety of magazines depending on the focus of the particular issue.

Our Publishing segment can experience fluctuations in quarterly performance. For example, our newsstand sales and advertising dollars tend to be highest in the fourth 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. Additionally, the publication schedule for our special interest issues can vary and lead to quarterly fluctuations in the segment’s results.

Our Television business segment consists of our operations relating to the production of new television programming and to the domestic and international distribution of that programming in existing and repurposed formats through a variety of distribution channels, including syndication, network broadcast and cable broadcast. We generally own the copyrights in the television programming we produce.

The Martha Stewart Living program is the cornerstone of our television production operations. The program is a syndicated how-to daytime program hosted by Martha Stewart consisting of several segments, each of which generally ties into one of our eight core content areas. Originally launched as a half-hour weekend program in 1993, we added a daily half-hour program in 1997 which expanded to a daily one-hour program in 1999. We produce Martha Stewart Living primarily at our studio facility in Westport, Connecticut, and segments are filmed both in the studio and at various other locations. The program has won numerous Emmy awards in various categories.

King World Productions, Inc. syndicates the program domestically under a distribution agreement that expires after the 2004 — 2005 broadcast season. Under the agreement, 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 national advertising base and allows us to include television advertising in multimedia sales packages offered to advertisers. The program can currently be seen in approximately 90% of all U.S. television households. The average U.S. rating of the weekday program during calendar year 2001 was 1.5.

The program is also broadcast in Canada by Alliance Atlantis Broadcasting, Inc. over its Life Network cable channel and HGTV Canada for which we are compensated with a license fee. This agreement expires in August 2002, but contains a one-year extension at our election. The program is also dubbed in Japanese and broadcast over the LaLa cable channel in exchange for a license fee.

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.

We also produce three half hour programs entitled from Martha’s Kitchen, from Martha’s Home and from Martha’s Garden. Each of these programs are produced from category-specific segments that originally aired in the Martha Stewart Living program. During 2001, from Martha’s Kitchen aired daily on The Food Network in the United States and Canada. Our advertising sales force sells most of the advertising for the program’s United States airings and we received a license fee in exchange for the Canadian broadcasts. Our domestic distribution agreement expires in September 2002 and our Canadian agreement expires in August 2002, subject to a one-year extension at our option. from Martha’s Home and from Martha’s Garden began airing in fourth quarter 2001 in the United States on the Home and Garden Television cable network. We receive a license fee for these programs pursuant to an agreement that expires in December 2003.

We have periodically produced prime time holiday specials which have aired on the CBS network. Martha Stewart’s Home for the Holidays, our 2001 Christmas special, achieved a 7.0 U.S. household rating. We have purchased the relevant airtime for our specials from CBS and then our advertising sales staff has sold the advertising to air during the special.

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.

Revenue and operating results from our Television segment tend to be higher in the fourth quarter due to generally higher ratings and the broadcast of our prime-time television special.

Our Merchandising segment consists of our operations relating to the design of merchandise and related packaging, promotional and advertising materials, and the licensing of various trademarks owned by us, in connection with retail programs conducted through third party retailers and manufacturers.

Martha Stewart Everyday is the brand label under which our merchandise is sold in the mass-market and national chain channels of distribution. Currently, the label is associated with products that generally fall into the following categories: Home (which includes sheets, towels, pillows, bath accessories, window treatments and kitchen textiles), Garden (which includes outdoor furniture, garden tools, fertilizers, planting pots, bulbs, seeds and live plants), Kitchen (which includes cookware, bakeware, dinnerware, flatware, and beverageware), Keeping (which includes organizational products relating to the pantry, closet and laundry), Decorating (which includes mirrors, picture frames, candles and lamps), and Colors (which consists of a line of interior paints available in 256 colors). Additionally, we are scheduled to launch a Holiday line consisting of Christmas decorating products and ornaments in Winter 2002.

In the United States and Canada, these products, other than the paint products, are sold pursuant to exclusive agreements with Kmart Corporation and The Hudson’s Bay Company (through its Zellers stores), although Zellers does not carry the full assortment of products. Pursuant to these agreements, we are primarily responsible for the design of all merchandise and related packaging, signage and advertising and promotional materials, while our retail partners source the products through a large manufacturer base. The paint products are manufactured pursuant to an agreement between us and The Sherwin-Williams Company and are then distributed by Sherwin-Williams to Kmart and Sears in the United States and Canadian Tire in Canada. Additionally, merchandise is sold under the Martha Stewart Everyday brand label by The Seiyu, Ltd. in Japan. Pursuant to our agreement with Seiyu, Seiyu offers products from our domestic assortment as well as products modified from our domestic assortment for the Japanese market and original product designed by Seiyu, subject to our brand direction and approval, for the Japanese market.

We own the Martha Stewart Everyday trademark and generally retain all intellectual property rights related to the designs of the merchandise, packaging, signage and collateral materials developed for the various programs. We are also generally assured sufficient in-store presence and volume to establish and protect our brands through guaranteed minimum royalties and through dedicated store-within-a-store selling formats.

Martha Stewart Everyday products are now offered at over 2,100 Kmart stores and 1,000 Sears stores in the United States, 300 Zellers stores and 300 Canadian Tire stores in Canada, and 226 stores owned by Seiyu in Japan.

In 2001 we entered into a new agreement with Kmart that expires in January 2008, with an automatic five-year renewal in the event certain performance targets are met. Under our previous agreements with Kmart, we were paid a royalty on wholesale purchases of our products by Kmart, and we were reimbursed for all our design and related expenses. Under the new agreement, we are paid a royalty on sales of Martha Stewart Everyday products to consumers, and we no longer receive reimbursement of most expenses, instead receiving a higher royalty that compensates us for the loss of reimbursement. In January 2002 Kmart filed for bankruptcy under Chapter 11. As of March 12, 2002, our agreement has been neither rejected nor assumed, although Kmart has commenced proceedings to assume the contract. We are monitoring the situation closely to evaluate its impact on our business. While the loss of Kmart as a business partner would be significant, we are confident that we would be able to realize significant value over the long term from our Martha Stewart Everyday brand label in that eventuality. Revenues from Kmart constituted approximately 13% of our total revenues in 2001. Our agreements with Zellers and Seiyu provide for the payment to us of royalties on wholesale purchases of our products and expire in February 2003 and August 2006, respectively. Our agreement with Sherwin-Williams expires in December 2005 and provides for royalties payable on sales by Sherwin-Williams of our Martha Stewart Everyday paints.

Martha Stewart Signature is the brand label under which our products are offered in the specialty channel of distribution. Through agreements with various retailers and manufacturing partners, we are developing a national network of retailers offering coordinated categories of home decorating products. We own the trademark Martha Stewart Signature and generally retain all intellectual property rights related to the designs of the merchandise, packaging, signage and collateral materials developed for the various programs.

Fabrics. Through an agreement with P/ Kaufmann, Inc. which expires in December 2003, a wide variety of decorative fabrics designed by us are offered at various retail specialty stores. We are paid a royalty on sales by P/ Kaufmann to retailers.

Paint. Beginning in Spring 2002, our Martha Stewart Signature Color Palette, consisting of 416 colors, will be available at over 1500 Sherwin-Williams stores. Consumers will be able to have any of the colors mixed in a wide variety of quality Sherwin-Williams paints. We will receive royalties on the sale of all paints mixed in a Martha Stewart Signature color. Our agreement with Sherwin-Williams expires in December 2005.

Floor Coverings. Beginning in Fall 2002, floor covering products, including area rugs, hardwood flooring, and broadloom carpeting, will be available at retailers nationwide. These products will be designed by

Furniture. Beginning in early 2003, furniture products for the living room, bedroom, and dining room will be available at fine furniture stores and department stores nationwide. Through an agreement with Bernhardt Furniture Company, Inc., these products will be designed by us and the Bernhardt design staff and manufactured and distributed by Bernhardt. Our agreement provides for royalty payments to us on sales of our products by Bernhardt and expires in early 2008.

The retail merchandising business is highly competitive. Our principal competitors are the competitors of the retail stores in which our products are sold. These stores currently include Target stores, Wal-Mart Stores, Inc. and other mass market discount stores, and will include others when our Martha Stewart Signature line is launched in full. Competitive factors include numbers and locations of stores, brand awareness and price. Additionally, our Martha Stewart Signature products will compete with other products in their categories and available at the participating stores, including branded and non-branded merchandise.

Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines.

Our Internet/ Direct Commerce segment consists of our operations relating to our internet and catalog businesses.

We develop and source merchandise that we sell through our catalog, Martha by Mail, and our internet site, marthastewart.com. The merchandise we sell consists of both exclusive and non-exclusive products that fall into a wide variety of home-related categories, including kitchenware, garden products, tabletop products, crafts products, bedding, and fresh cut flowers. A given catalog will contain from 400 to 600 different product offerings, while our e-commerce site offers approximately 2,000 product offerings. In 2001, we mailed 16.6 million copies of the catalog in 12 editions. 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. In 2001 we completed a re-architecture of our website at a cost of approximately $14 million. Completed in October, the site offers considerably better traffic and transaction capacity, merchandising capabilities and efficient checkout and customer experience. We believe that the new site will dramatically enhance our e-commerce capabilities and lead to improved results. In 2001, approximately 55% of our commerce sales were placed online.

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 source and purchase all our Martha by Mail product and manage our merchandise inventory. During 2001, our merchandise fulfillment was conducted by Time Customer Service, an affiliate of TPV. In February 2002, however, we transitioned that fulfillment service to Innotrac Corporation, pursuant to a three-year agreement terminable by us on 180 days notice. We believe that this arrangement addresses our current needs and provides for continued growth in this area for the foreseeable future.

In 2001, the substantial majority of the Internet/ Direct Commerce segment’s revenues came from the sale of merchandise.

In addition to our e-commerce capability, marthastewart.com offers eight linked content channels, each dedicated to one of our core content areas, as well as our online television and radio program guides and various other features. 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. Additionally, we use the content portions of our website to attract visitors and then convert them into buyers for our direct commerce business. Our redesigned website more seamlessly integrates content and commerce and should increase the conversion of content users to buyers. We believe the content portion of our website is popular with our consumers and is an important ingredient in sustaining brand loyalty and cross-promoting our various activities. Total unique visitors in December 2001, as measured by Media Metrix, was approximately 1.9 million. Approximately 9% of this segment’s revenues were from advertising.

Competitors of our Internet/ Direct Commerce segment include Plow & Hearth, Chef’s Catalog, Eddie Bauer Home, Garnet Hill Company, Crate and Barrel, Pottery Barn (and other catalogs owned by Williams Sonoma, Inc.), 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.

Internet/ Direct Commerce segment revenues tend to be higher in the fourth quarter due to increased consumer and advertiser spending during the holiday period.

We use multiple trademarks to distinguish our brands, including Martha Stewart Living, Martha Stewart Everyday, Martha Stewart Signature, 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 domestically and internationally, 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 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 and license 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.

Information concerning the location, use and approximate square footage of our principal facilities, all of which are leased, is set forth below:

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.

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.

No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ending December 31, 2001.

Item 5. Markets for Registrant’s Common Equity and Related Stockholder 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 share-for-share basis.

As of March 8, 2002, there were 4,929 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 foreseeable future.

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-6 of this Report.

The information required by this Item is set forth on pages F-8 through F-26 of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 9, 2002 (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.

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.

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.

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.


*	Incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001.

**	Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1999, 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.

****	Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File Number 001-15395.

*****	Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2000, File Number 001-15395.

†	Indicates management contracts and compensatory plans.

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.


	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.


*	Incorporated by reference to our Registration Statement on Form S-1, File Number 333-84001.

**	Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1999, 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.

****	Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File Number 001-15395.

*****	Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2000, File Number 001-15395.

All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.


(1)	Pro forma net income reflects the income taxes that would have been recorded had the Company been a “C” Corporation for the years 1997 through 1999.

(2)	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.

(3)	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.

Revenues Total revenues increased $9.9 million, or 3.5%, to $295.7 million for the year ended December 31, 2001, from $285.8 million for the year ended December 31, 2000. Publishing revenues increased $2.5 million, or 1.4%, to $181.7 million for the year ended December 31, 2001, from $179.2 million for the year ended December 31, 2000. Circulation revenues increased $4.1 million, slightly offset by advertising revenue decreases of $1.5 million for the year ended December 31, 2001. Circulation increases primarily resulted from the increased frequency of Martha Stewart Living magazine, as well as increased circulation revenues from special issue publications. Martha Stewart Living magazine was published 12 times in 2001, compared with eleven times in 2000. In 2001, the Company published seven special interest magazines compared with three special interest magazines in 2000. Advertising revenues decreased primarily as a result of a lower number of advertising pages sold in Martha Stewart Living magazine, partially offset by increases from the special interest publications. Television revenues decreased $2.9 million, or 9%, to $29.5 million for the year ended December 31, 2001, from $32.5 million for the year ended December 31, 2000. The decrease is due primarily to reduced advertising revenues resulting from lower industry-wide advertising rates and lower ratings from our syndicated daily program. We expect these lower industry-wide advertising rates to continue throughout 2002. Merchandising revenues increased $11.3 million, or 46%, to $35.6 million for the year ended December 31, 2001, from $24.3 million for the year ended December 31, 2000, primarily as a result of revenues received from new product introductions in 2001 and an increase in royalty rate under our new agreement with Kmart Corporation, effective August 1, 2001. On January 22, 2002, Kmart filed for bankruptcy under Chapter 11. Kmart has indicated that they intend to close a number of stores as part of their reorganization in 2002. The revenues we receive from Kmart are based upon retail sales of our products. Accordingly, our revenues will be impacted in the future by the actual number of store closings. Internet/ Direct Commerce revenues decreased $0.9 million, or 1.8%, to $48.8 million for the year ended December 31, 2001, from $49.7 million for the year ended December 31, 2000, due primarily to decreased advertising revenues of $2.7 million, partially offset by increased merchandise sales of $1.7 million.

Production, Distribution and Editorial Production, distribution and editorial expenses increased $2.6 million, or 1.6%, to $160.0 million for the year ended December 31, 2001, from $157.4 million for the year ended December 31, 2000. Publishing segment costs increased $3.6 million, reflecting the increased number of issues produced in 2001. Merchandising costs increased $3.2 million due to the elimination of cost reimbursements from Kmart Corporation as part of our new agreement, which commenced in August. Internet/ Direct Commerce costs decreased $3.6 million primarily due to a reduction in catalog production and distribution costs of approximately $4.5 million due to lower catalog circulation and reductions in outside consulting fees of approximately $2.3 million, partially offset by $3.8 million in Wedding List costs.

Selling and Promotion Selling and promotion expenses increased $.6 million, or 1%, to $46.7 million for the year ended December 31, 2001, from $46.1 million for the year ended December 31, 2000. Publishing segment costs decreased $1.4 million, resulting primarily from reduced circulation costs. Internet/ Direct Commerce segment costs increased $1.4 million, resulting primarily from costs associated with the acquired Wedding List business.

General and Administrative General and administrative expenses increased $.7 million, or 2%, to $42.1 million for the year ended December 31, 2001, from $41.5 million for the year ended December 31, 2000. The higher expenses have been incurred primarily as a result of higher occupancy costs related to our new office facility, which we began occupying in December 2000.

Depreciation and Amortization Depreciation and amortization increased $3.7 million, or 40%, to $12.8 million for the year ended December 31, 2001, from $9.1 million for the year ended December 31, 2000. The increase is primarily attributable to depreciation from our higher levels of property and equipment associated with the new facility.

Interest Income, Net Interest income, net, was $3.9 million for the year ended December 31, 2001, compared with $5.6 million for the year ended December 31, 2000. Interest income for the year ended December 31, 2001, resulted from lower interest rates applied to slightly higher average cash balances.

Income Tax Provision Income tax provision for the year ended December 31, 2001, was $16.1 million, representing a 42.3% effective income tax rate as compared with $16.0 million and an effective rate of 42.9% for the year ended December 31, 2000. The reduced rate during 2001 was attributable primarily to lower state income taxes.

Net Income Net income was $21.9 million for the year ended December 31, 2001, compared with net income of $21.3 million for the year ended December 31, 2000, as a result of the above mentioned factors.

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. This increase reflects an increase in advertising revenues of $25.1 million, primarily 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. Martha Stewart Living magazine was published eleven times in 2000, compared with ten times in 1999. In 2000, the Company published two issues of Martha Stewart Baby and one issue of Martha Stewart Holiday-Halloween 2000, compared with 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 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 a higher number advertising pages sold per issue.

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 were 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.

Interest Income (Expense), Net Interest income, net was $5.6 million for the year ended December 31, 2000, compared with interest expense, net, of $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 (Benefit) Income tax provision for the year ended December 31, 2000, was $16.0 million, representing a 42.9% 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 that 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 with 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.

Cash and cash equivalents were $141.2 million, $127.4 million and $154.7 million at December 31, 2001, 2000 and 1999, respectively.

Cash flows from operating activities were $19.4 million, $39.5 million and $28.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Cash flows from operating activities in 2001 resulted primarily from net income of $21.9 million, depreciation and amortization of $12.8 million, tax benefit from stock option exercises of $1.8 million, partially offset by reductions of $12.0 million in accounts payable and accrued liabilities. Reductions in accounts payable and accrued liabilities were primarily attributable to the timing of payments associated with our new office facility, our Internet technology upgrade project and other vendor payments for product purchases. Accounts receivable decreased $3.4 million from the prior year due to the timing of revenues in the fourth quarter. 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 flows used in investing activities were $8.1 million, $38.1 million and $6.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Cash flows used in investing activities in 2001 reflect capital expenditures of $17.3 million, primarily for our website technology upgrade project, $3.9 million used to acquire The Wedding List, partially offset by net investment proceeds of $13.1 million, primarily received from the sale of our equity investment in BlueLight.com. Cash flows used in investing activities in 2000 reflect a $13.3 million equity investment in BlueLight.com and $24.8 million in capital expenditures for property and equipment. Cash flows used in investing activities in 1999 represent capital expenditures for property and equipment. We expect capital expenditures to decline to within a range of $8 million to $10 million in 2002.

Cash flows provided from financing activities for the year ended December 31, 2001, were $2.4 million, resulting from the exercise of stock options, partially offset by purchases under a stock repurchase program. 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 during the year ended December 31, 1999, was $108.2 million. 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, for a 5% equity investment in Martha Stewart Living Omnimedia, LLC (MSLO), predecessor to the Company. 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.

We have a line of credit with Bank of America in the amount of $10 million, which is available to us for seasonal working capital requirements and general corporate purposes. As of December 31, 2001, we had no outstanding borrowings under this facility.

During the year ended 2001, revenues from Kmart Corporation were approximately 13% of the Company’s total revenues. As of December 31, 2001, accounts receivable from Kmart were approximately $10.7 million and approximately $13.0 million at the date of Kmart’s bankruptcy filing. In March 2002, Kmart assumed its contract with the Company. Accordingly, the Company expects to receive payment for all amounts due under the contract as of the bankruptcy filing date.

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 have not paid dividends on our common stock and do not intend to pay any dividends in the foreseeable future.

Several of our businesses can experience fluctuations in quarterly performance. For example, 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. Additionally, the publication schedule of special issue magazines can vary from quarter to quarter. Revenue and income from operations for the Television segment tend to be higher in the fourth quarter due to 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 and the seasonality of certain product lines.

To the Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.

We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedule referred to below included on pages F-8 through F-26, 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 subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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 consolidated 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, 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.

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

Martha Stewart Living Omnimedia, Inc. (together with its wholly owned subsidiaries, the “Company”) includes the operations, assets and liabilities of Martha Stewart Living Omnimedia LLC (“MSLO”), a predecessor to the Company, which was merged with and into the Company on October 22, 1999. This merger was accounted for as a combination of companies under common control and, accordingly, the financial statements for prior periods have been retroactively restated.

In 1997, the Company entered into an agreement with Time Publishing Ventures, Inc. (together with its parent and affiliated companies, “Time”) and purchased Martha Stewart Living magazine as well as the rights to any Martha Stewart Living publications, television programs related to Martha Stewart and the Martha by Mail business, as well as related liabilities, for approximately $53,276, including related acquisition costs (the “MSL acquisition”). Time received a promissory note for $30,000 and a 6.27% equity interest in the Company. The purchase price was calculated taking into consideration the special income distribution of $18 million payable to Time pursuant to the limited liability company agreement of the Company. This distribution was made in February 1997. This transaction, which was consummated on February 3, 1997, has been accounted for as a purchase as of January 1, 1997, the effective date on which the assets and liabilities were transferred. In addition, Time and certain of its affiliates entered into transition and other service agreements with the Company, which are described in Note 9.

The Company is a leading creator of original “how to” content and related products for homemakers and other consumers. The Company’s business segments are Publishing, Television, Merchandising and Internet/ Direct Commerce. 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, Japan (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, and licensing of certain of the Company’s trademarks in connection, with merchandise and related promotional and packaging materials that are distributed by the Company’s 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, the website marthastewart.com and the Wedding List.

The Company’s revenues from foreign sources were $9,795, $8,322 and $6,233 in 2001, 2000 and 1999, respectively.

The consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries. All significant intercompany transactions have been eliminated.

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 of the date of acquisition.

Magazine advertising revenues are recorded upon release of magazines for sale to consumers and are stated net of agency commissions and cash and sales discounts. Allowances for estimated bad debts are provided based upon historical experience.

A proportionate share of magazine subscription revenue is recognized as magazines are delivered to subscribers.

Newsstand revenues are recognized based on the on-sale dates of magazines and are recorded based upon estimates of sales. Estimated returns are recorded based upon historical experience.

Television advertising revenues are recognized when the related commercial is aired and is recorded net of estimated reserves for television audience under delivery.

Royalties and television appearance fees are recorded as earned in accordance with the specific terms of each agreement.

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, representing the excess of purchase price over net assets acquired, have been 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 consisting of paper and product merchandise are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

Advertising costs, consisting primarily of direct-response advertising, are expensed in the year incurred.

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 years ended December 31, 2001, and 2000, the dilutive effect of stock options included in the determination of diluted weighted average common shares outstanding were approximately 401,000 and 946,000, respectively. The antidilutive options excluded from this amount totaled 5,013,814 and 571,025, with a weighted average exercise price of $19.05 and $25.91, in 2001 and 2000, respectively.

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).

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:

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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 position or results of operations.

In March 2001, the Company paid cash of approximately $3.9 million and assumed certain liabilities to acquire the assets of The Wedding List, a wedding registry and gift business. The acquisition has been accounted for using the purchase method of accounting and, accordingly, has included the results of operations of the acquired business commencing upon the acquisition date. The acquisition resulted in goodwill of approximately $5.3 million, which has been recorded based upon a preliminary estimate of the fair value of net assets acquired and is being amortized over twenty years.

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.

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).

The Company has two classes of common stock outstanding. The Class B common stock is identical in all respects to Class A common stock, except with respect to voting and conversion rights. Each holder of Class B common stock is entitled to ten votes for each share held of record and is convertible on a one-for-one basis to Class A stock.

In September 2001, the Board of Directors authorized the repurchase of up to $5,000 of the Company’s outstanding common stock. Pursuant to the program, purchases of stock may be made from time to time, in the open market, subject to market conditions and at prevailing market prices. During the year ended December 31, 2001, the Company purchased approximately 59,000 shares of its Class A common stock at a cost of $775.

The components of accounts receivable at December 31, 2001 and 2000 are as follows:

The components of property, plant and equipment at December 31, 2001 and 2000 are as follows:

Depreciation expense was $9,578, $6,140, and $3,610 for the years ended December 31, 2001, 2000 and 1999, respectively.

Included in property, plant and equipment are assets that were acquired under capital leases in the amount of $7,781, with accumulated amortization of $5,793 and $3,362 at December 31, 2001 and 2000, respectively. Depreciation expense associated with assets under capital leases is included in total depreciation expense.

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 2001 and 2000 and $10 in 1999), 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 $927, $779 and $385 for the years ended December 31, 2001, 2000 and 1999, respectively.

The Company does not sponsor any postretirement and/or postemployment benefit plan.

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. The Company has an agreement with Martha Stewart whereby she will periodically return to the Company shares of Class B common stock owned by her or her affiliates in amounts corresponding on a net treasury basis to the number of these options exercised during the relevant period. During 2000, 238,456 shares of Class B common stock were returned under this agreement. Accordingly, options outstanding under this plan are not dilutive. The vesting schedule for options granted under the plan is generally as follows: 10% at December 31, 1998 and 1999, 20% at December 31, 2000 and 2001, and 40% on December 31, 2002. The status of this stock option plan is summarized as follows:

The Company has additional stock option plans that provide for the granting of stock options to employees and non-employee members of the Company’s Board of Directors. The options granted under these plans are to purchase Class A common stock at the fair market value at the date of grant. Employee stock options vest ratably on each of the first four anniversaries of the grant date. Non-employee director options

vest on the first anniversary of the date of the grant of such option. The term of the options granted under these plans is ten years. The status of these stock option plans is summarized as follows:

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:

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, 2001, 2000 and 1999, were as follows:

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.

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, 2001, 2000, and 1999:

A reconciliation from the federal income tax provision at the statutory rate to the effective rate for the year ended December 31, 2001 and 2000 is as follows:

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, 2001 and 2000 are as follows:

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 $32,042, $34,749 and $26,812 in 2001, 2000 and 1999, respectively, including $31,331, $34,149 and $26,205 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 $21,753, $21,462 and $16,063 in 2001, 2000 and 1999, respectively. The Company no longer uses Time to provide such services for Martha by Mail Products.

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 $2,338, $2,091 and $1,658 in 2001, 2000 and 1999, respectively.

The aggregate amounts due to Time included in accounts payable and accrued liabilities were approximately $6,784 and $11,628 as of December 31, 2001 and 2000, respectively. Aggregate amount due from Time included in accounts receivable, net, was $1,335 and $1,424 as of December 31, 2001 and 2000 respectively.

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 $2,296, $2,327 and $2,531, in 2001, 2000 and 1999, 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, in each of 2001, 2000, and 1999.

In 2001, the Company entered into a split dollar life insurance arrangement with Martha Stewart and a partnership controlled by her (the “Partnership”) pursuant to which the Company agreed to pay a significant portion of the premiums on a whole life insurance policy insuring Ms. Stewart and owned by and benefiting

the Partnership. The Company will be repaid the cumulative premium payments it has made upon the earlier of Ms. Stewart’s death or the voluntary termination of the arrangement by Ms. Stewart. If the arrangement lasts more than sixteen years, the Company will no longer be obligated to make premium payments and will receive interest on the outstanding amount paid by the Company as of such time. As of December 31, 2001, the aggregate amount paid by the Company under this arrangement is $1,122.

During 2001, 2000 and 1999 the Company paid $255, $216 and $194 respectively, to a company owned by Martha Stewart for various expenses incurred on the Company’s behalf.

From time to time, the Company uses the service of a law firm of which Martha Stewart’s son-in-law is a partner. The Company paid an aggregate of approximately $72 and $166 in fees and expenses in respect of such services in 2000 and 1999, respectively.

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, 2001, the Company did not have any amounts outstanding under this agreement.

During the year ended 2001, the revenues from Kmart Corporation were approximately 13% of the company’s total revenues. As of December 31, 2001, accounts receivable from Kmart were approximately $10,700. On January 22, 2002, Kmart Corporation filed for reorganization under Chapter 11 bankruptcy protection. The Company is a party to a long- term license agreement with Kmart. The Company expects to receive payment for all amounts due under the contract as of the bankruptcy filing date.

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 $8,390, $8,927, and $3,341 for the years ended December 31, 2001, 2000, and 1999, respectively.

The following is a schedule of future minimum payments under capitalized and operating leases at December 31, 2001:

The Company has outstanding letters of credit for $2,326 as security for certain leases as of December 31, 2001.

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 or other third party indemnities, will not, individually or in the aggregate, have a material adverse effect on the Company’s financial position or results of operations.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and long-term debt. The carrying amount of these accounts approximates fair value.

Accumulated amortization of intangible assets was $14,989 and $11,802 at December 31, 2001 and 2000, respectively. Amortization expense was $3,187, $2,950, and $2,950 for the years ended December 31, 2001, 2000, and 1999, respectively.

Advertising expense was $15,415, $16,276, and $14,541 for the years ended December 31, 2001, 2000, and 1999, respectively.

Interest paid was $390, $598, and $2,705 for the years ended December 31, 2001, 2000, and 1999, respectively.

Income taxes paid were $17,613, $10,372 and $716 for the years ended December 31, 2001, 2000, and 1999, respectively.

Included in other noncurrent assets at December 31, 2000, is an investment of approximately $13.3 million in BlueLight.com, an e-commerce company. The investment was carried at cost. During the year ended December 31, 2001, the company received $13.3 million in connection with the sale of its equity in BlueLight.com to Kmart Corporation.

The Company’s industry segments are discussed in Note 1. Segment information for the years ended December 31, 2001, 2000, and 1999 was as follows:

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to an annual assessment for impairment by applying a fair-value based test. The standard is effective beginning January 1, 2002. The Company has yet to determine the impact of the standard on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations. The standard is effective beginning January 1, 2002. The Company has determined that the impact of initial adoption will not have a material impact on the results of operations or financial position.

F-24 EX-10.14.2 3 y58396ex10-14_2.txt SPLIT DOLLAR LIFE INSURANCE AGREEMENT Exhibit 10.14.2 AMENDMENT TO SPLIT-DOLLAR AGREEMENT THIS Amendment is made and entered into this 28th day of January, 2002, by and among Martha Stewart Living Omnimedia, Inc., a Delaware corporation, having an address of 11 West 42nd Street, 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 Corporation, the Employee and the Owner (collectively the "parties") executed an agreement on February 28, 2001 known as the "Split Dollar Agreement" (the "Agreement"); and WHEREAS, the Agreement terminates upon the second day of the sixteenth year of the Policies; and WHEREAS, the parties now wish to amend the Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement, the parties agree as follows: 1. The second sentence of Section 2.b. is amended to read as follows: "Specifically, but without limitation, the Corporation shall neither have nor exercise any right as collateral assignee of any of the Policies which could in any way defeat or impair the Owner's right to receive the cash surrender values or the death proceeds of the Policies in excess of the amount due the Corporation under this Agreement." 2. Section 4 is amended to read as follows: "4. PAYMENT OF PREMIUMS. a. This paragraph 4.a. shall apply only for premiums due on a Policy prior to the Original Termination Date. Thirty (30) days prior to the due date of a premium on a Policy, the Corporation shall notify the Owner of the exact amount 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. 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. On or before the due date of each Policy premium, or within the grace period provided therein, the Corporation shall pay, subject to the contribution provided above, the full amount of the premium to the Insurer, and shall, upon request, promptly furnish the Owner evidence of timely payment of that premium. Any contribution towards a premium payment actually paid by the Owner, or the Employee on behalf of the Owner, under this paragraph 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. This paragraph 4.b. shall apply only for premiums due on a Policy after the Original Termination Date. Thirty (30) days prior to the due date of a premium on a Policy, the Corporation shall have notified the Owner of the upcoming premium and the exact amount 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. Either the Owner, or the Employee on behalf of the Owner, shall have provided evidence to the Corporation of payment of the premium, or shall pay the required amount prior to a due date to the Corporation, which upon receipt shall forward that amount to the Insurer. Any payment actually made by the Owner, or the Employee on behalf of the Owner, under this paragraph shall be considered to be a payment by the Owner or the Employee for purposes of calculating the amount to be repaid the Corporation under Sections 6, 7 and 9 of this Agreement. c. Prior to the Original Termination Date, the premiums on both Policies shall total ONE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND SIXTY-NINE DOLLARS ($1,174,069) annually. For purposes of this Section 4, the "annual cost of current life insurance protection" under a Policy on the life of the Employee provided under that Policy, shall be calculated using the lower of (1) the Table 2001 rate, set forth in Internal Revenue Service Notice 2002-8 (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. 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. 3. A new sentence is added to the end of Section 5 as follows: "This paragraph shall not preclude the corporation from seeking, under other provisions of this Agreement, from the Owner any amounts still due (after taking into consideration amounts actually repaid as noted above) the Corporation under Sections 6.c., 7.b. and 9.a. of this Agreement." 4. Sections 6.a. and 6.b. are amended to read as follows: "a. While this Agreement is in effect, the Owner shall take no action 2 regarding any Policy subject to this Agreement that would in any way compromise or jeopardize the Corporation's right to be repaid the amounts it has paid toward premiums on, plus any other amounts owed the Corporation under this Agreement with respect to, those Policies. 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, or make withdrawals from a Policy, in an amount not to exceed (1) the cash surrender value of that Policy as of the date to which premiums have been paid less (2) the aggregate amounts paid toward premiums on that Policy by the Corporation plus any unpaid Interest Amount for that Policy plus any unpaid Remaining Amount for any other policy that has been previously surrendered or cancelled. Interest charges on such a loan shall be the responsibility of and be paid by the Owner." 5. The first two sentences of Section 6.c. are amended to read as follows: "c. The Owner shall have the sole right to surrender or cancel a Policy, and to receive the cash surrender value of that Policy from the Insurer after the Corporation has been paid as follows: upon the surrender or cancellation of that Policy, the Corporation shall have the unqualified right to receive directly from the Insurer a portion of the cash surrender value of that Policy equal to the Original Termination Amount for that Policy, plus any unpaid Interest Amount for that Policy calculated as of the surrender or cancellation, plus any unpaid Remaining Amounts for any other Policy that has been previously surrendered or cancelled." 6. Section 7.b. is amended to read as follows: "b. Upon the death of the Employee, the Corporation shall have the unqualified right to receive directly from the Insurer a portion of the death benefits of a Policy that remains subject to this Agreement equal to the aggregate amount of the premiums paid by the Corporation with respect to that Policy, plus any unpaid Interest Amount with respect to that Policy, plus any unpaid Remaining Amounts for any other policy that has been previously surrendered or cancelled (all determined as of the date of death). 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. 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, and that the Parties shall take any actions necessary to effect that conformity." 7. Section 8.a.(1) is amended to read "(1) January 27, 2017 (the `Original Termination Date');", and the following paragraph c. is added to Section 8 of the Agreement: 3 "c. Notwithstanding paragraph a. of this Section 8, the Owner, by notice to the Corporation given at any time prior to the Original Termination Date of the Policies, may elect to postpone the termination of this Agreement." 9. The first two sentences of Section 9.a. of the Agreement are amended to read as follows: "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 of a Policy, the Owner shall repay to the Corporation the Original Termination Amount with respect to that Policy and any unpaid Interest Amount with respect to that Policy, plus any unpaid Remaining Amounts for any other policy that has been previously surrendered or cancelled, (all as determined as of the date of termination)." 10. The second sentence of Section 9.b. of the Agreement is amended to read as follows: "Alternatively the Corporation may enforce, pursuant to the collateral assignment of that Policy, the Corporation's right to be repaid, out of that Policy's cash surrender value, the amount which the Corporation would otherwise be paid under Section 9.a. if the Owner had obtained the appropriate release; provided that if the cash surrender value of that Policy exceeds the amount due the Corporation, that excess shall be paid to the Owner." 11. A new Section 16 is added as follows: "16. PAYMENT OF INTEREST AMOUNT. If the Owner has made the election described in Section 8 c. of this Agreement, the Interest Amount shall accrue from the Original Termination Date, and shall be payable by the Owner to the Corporation on each anniversary of that date, except that the Corporation may elect to allow the Interest Amount accrued for the prior year to be added to "Principal," as described under Section 19." 12. A new Section 17 is added as follows: "17. DEFICIENCIES AND OTHER SECURITY. a. Upon (1) the earlier of the termination of this Agreement (whether or not extended by the Owner as set forth above) or the surrender or cancellation of all Policies subject to this Agreement, or (2) the death of the Insured, if earlier than (1), the Owner shall pay the Corporation (3) the total amount the Corporation would have received under Section 9. (or Section 6. as the case may be) if the cash surrender values of the Policies 4 had been sufficient or under Section 7 if the death benefits had been sufficient, less (4) amounts paid or payable to the Corporation from the Policies. b. From time to time after the Original Termination Date, the Owner shall promptly execute and deliver all instruments and documents and take all action that the Corporation may reasonably request to grant, perfect or protect one or more security interests in the Owner's assets (other than the Policies) to the extent that the Corporation reasonably considers itself insecure with respect to the amounts owed to it under this Agreement, taking into consideration, however, the unencumbered cash surrender value of the Policies. c. During any time that the Employee does not have the right to vote shares of stock of the Corporation having more than 50% of the total combined voting power of all classes of stock of the Corporation, and is not a controlling stockholder of the Corporation within the meaning of the regulations issued by the Treasury under Section 2042 of the Internal Revenue Code of 1986, as amended (or any successor provision), the Corporation shall have the power to direct the Owner as to the exercise of the investment powers with respect to the Policies. For purposes of this provision, the Employee shall be deemed to have the right to vote all shares of stock of the Corporation owned by the Owner and the shares of stock of the Corporation owned by any other entity which she controls directly or indirectly." 13. A new Section 18 is added as follows: "18. DEFAULT. If, within 90 days after the Owner has been notified by the Corporation of a default, that default has not been cured, this Agreement shall terminate. A default shall be considered to have occurred only if (1) the Owner fails to pay interest when due, as set forth in Section 16 above or (2) there is a breach of Section 17.b." 14. A new Section 19 is added as follows: "19. MISCELLANEOUS AND DEFINITIONS. a. For purposes of this Agreement in the event that both Policies are in fact surrendered or cancelled on the same date, the Policy whose surrender or cancellation would result in the largest "Remaining Amount" shall be deemed to have been surrendered or cancelled prior to the other Policy. Moreover, if the Owner surrenders or cancels one but not both Policies, and if surrender or cancellation of either Policy would result in a "Remaining Amount," the Owner may surrender or cancel only that Policy whose surrender or cancellation would result in the largest "Remaining Amount." b. As used in this Agreement: 5 "Original Termination Amount" means, with respect to a Policy, the lesser of (1) the aggregate amount of premiums paid by the Corporation with respect to that Policy; and (2) the cash surrender value of that Policy plus the amount of the aggregate unreturned withdrawals from that Policy. For purposes of this provision, the use of some or all of a Policy's cash surrender value to pay any part of a loan secured by that Policy shall be treated as a withdrawal from that Policy. The Original Termination Amount of a Policy shall be calculated upon the earliest to occur of: the Original Termination Date, the date a Policy is surrendered or cancelled, and the date this Agreement is terminated. "Remaining Amount" means, with respect to a Policy, the Original Termination Amount less the cash surrender value, but not below zero. "Interest Amount" means, at the time the term is being applied with respect to a Policy, an amount equal to the interest that would have accrued at the Rate on a loan assuming the principal (the "Principal") of the loan equaled (1) the Original Termination Amount for that Policy, plus (2) the unpaid Remaining Amount for a Policy that has been surrendered or cancelled prior to the Original Termination Date, plus (3) any Interest Amount for which the Corporation makes an election under Section 16. When and to the extent payments are made under this Agreement reducing any items used above in calculating the "Principal" for a Policy, the Principal shall be reduced in accordance with customary commercial terms. "Rate" means for each twelve month period after the Original Termination Date, the minimum rate necessary in the Corporation's reasonable and good faith judgment to avoid, for securities laws purposes, reporting compensation to the Employee due to the payment or accrual of interest under this Agreement; however, "Rate" shall not be less than the rate at which the Corporation may borrow from its customary lender(s) at the time the term is being applied. 15. In all other respects, the parties ratify the terms of the Agreement. 6 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 7 EX-10.15 4 y58396ex10-15.txt INVESTMENT AGREEMENT EXHIBIT 10.15 INVESTMENT AGREEMENT INVESTMENT AGREEMENT, dated as of January 8, 2002 (this "Agreement"), by and among Martha Stewart Living Omnimedia, Inc., a Delaware corporation (the "Corporation"), ValueAct Capital Partners, L.P. a Delaware limited partnership, ValueAct Capital Partners II, L.P. a Delaware limited partnership and ValueAct Capital International, Ltd. a British Virgin Islands corporation (collectively, "ValueAct"), and, for the purposes of Article I, Section 2.3 and Article V hereof only, The Martha Stewart Family Limited Partnership, L.P., a Connecticut limited partnership ("Stewart"). RECITALS: WHEREAS, pursuant to the terms of a Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), Stewart has agreed to sell to ValueAct, and ValueAct has agreed to purchase from Stewart, an aggregate of 3,000,000 shares of Class A Stock (the "Stock Purchase"); WHEREAS, in connection with the consummation of the Stock Purchase, the parties hereto desire to enter into certain arrangements relating to ValueAct's ownership of the Class A Stock. NOW, THEREFORE, in consideration of the premises and mutual covenants and obligations hereinafter set forth, the parties hereto agree as follows: ARTICLE I DEFINED TERMS Section 1.1. Definitions. Unless the context otherwise requires, the terms defined in this Article I shall, for the purposes of this Agreement, have the meanings herein specified. "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Affiliate" means with respect to a specified Person, any Person that directly or indirectly controls, is controlled by, or is under common control with, the specified Person, and that Person's spouse, estate, personal representative or lineal descendants or any trust for the benefit of such Person and/or such Person's spouse and/or such Person's lineal descendants or any entities controlled by such Person. As used in this definition, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "2002 Annual Meeting" shall have the meaning set forth in Section 2.3 hereof. -1- "Agreement" means this Investment Agreement, as amended, modified, supplemented or restated in accordance with the terms hereof from time to time. "Assign" and "Assignment" have the meanings set forth in Section 2.1 hereof. "Board" shall mean the Board of Directors of the Corporation. "Class A Stock" shall mean Class A Common Stock, par value $0.01 per share, of the Corporation. "Class B Stock" shall mean the Class B Common Stock, par value $0.01 per share, of the Corporation. "Corporation" shall have the meaning set forth in the preamble hereto. "Delaware Act" shall mean the Delaware General Corporation Law, as amended. "Directors" shall mean those individuals elected as members of the Board. "NYSE" shall mean the New York Stock Exchange, Inc. "Person" includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization. "Registration Request" shall have the meaning set forth in Section 3.1 hereof. "Stewart" shall have the meaning set forth in the preamble hereto. "Stockholders Agreement " means the Stockholders Agreement, dated as of October 19, 1999, by and among the Corporation and certain of its stockholders. "Stock Purchase" shall have the meaning set forth in the recitals hereof. "Ubben" shall have the meaning set forth in Section 2.3 hereof. "ValueAct" shall have the meaning set forth in the preamble hereto. Section 1.2. Headings. The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. ARTICLE II COVENANTS AND ACKNOWLEDGEMENTS Section 2.1. Investment Intent. ValueAct represents and warrants to the Corporation that it is acquiring the Class A Stock in the Stock Purchase for investment for its own account and not with the view to, or for resale in connection with, any distribution thereof. -2- Section 2.2. Transfers and Assignments. Prior to the first anniversary hereof, ValueAct shall not sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber ("Assign," and such act, an "Assignment") all or any part of the shares of Class A Stock owned by ValueAct; provided, however, that following the six- month anniversary hereof, ValueAct may distribute up to 50% of the shares acquired in the Stock Purchase to limited partners or other fund participants in the relevant ValueAct fund. The foregoing restriction shall not apply to any Assignment approved by the Board. ValueAct acknowledges that the Stock Purchase has not been registered under the 1933 Act, and that the Class A Stock acquired in the Stock Purchase may not be offered or Assigned except pursuant to an effective registration statement under the 1933 Act or an applicable exemption therefrom. Section 2.3. Board of Directors. Effective as of the date hereof, Jeffrey Ubben ("Ubben") has been appointed by the Board to the Board as a Director to fill an existing vacancy thereon, to serve until the 2002 annual meeting of the stockholders of the Corporation (the "2002 Annual Meeting"), unless earlier removed for cause (as such term is used in Section 141(k) of the Delaware General Corporation Law). The Corporation and Stewart agree that, subject to the Board's fiduciary duties under applicable law (after consultation in good faith with outside legal counsel) and unless earlier removed from the Board in accordance with the preceding sentence, Ubben shall be included in the slate of nominees recommended for election to the Board as Directors at the 2002 Annual Meeting by the Board. Stewart agrees to vote all of shares of Class A Common Stock and Class B Common Stock beneficially held by it in favor of Ubben's election to the Board as a Director at the 2002 Annual Meeting if Ubben is nominated therefor in accordance with the preceding sentence, and agrees that, if Stewart should seek to transfer shares of Class A Common Stock or Class B Common Stock such that, following such transfer, Stewart would have less than a majority of the outstanding voting power of the Corporation, Stewart shall require the transferees thereof to be bound by this sentence. ARTICLE III REGISTRATION RIGHTS Section 3.1. Form S-3 Registration. (a) If Form S-3, or any successor form thereto, is available for such offering, ValueAct may request in writing that the Corporation effect a registration on Form S-3 and any related qualification or compliance (a "Registration Request"), and the Corporation shall use its best efforts to effect, as soon as practicable, such registration, qualification or compliance as may be so requested and as would permit or facilitate the sale and distribution of all Class A Stock specified in such Registration Request and to maintain the registration on Form S-3 for 180 days following the effectiveness thereof; provided, that such 180-day period may be suspended if, in the good faith judgment of the Board, a corporate event requires such suspension, the Corporation shall use its best efforts to reinstate the effectiveness thereof for the remaining number of days. The Corporation shall not be obligated to effect more than three registrations on Form S-3 for ValueAct pursuant to this Section 3.1(a), or be obligated to effect more than one registration on Form S-3 during any six-month period; provided, however, that in no event shall the Corporation be obligated to effect a registration statement under this Section 3.1(a) within 120 days of the end of the effective period of any prior registration statement effected by the Corporation pursuant to a Registration Request. The anticipated net offering price of the shares of Class A Stock specified in the Registration Request shall be at least $10,000,000. Any registration -3- statement filed pursuant to this Section 3.1(a) may include other shares of Class A Stock that the Corporation is required to include in such registration statement by virtue of the Stockholders Agreement; provided, that in no event shall the number of shares of Class A Stock to be registered pursuant to the Registration Request be reduced in order to comply with any provision of the Stockholders Agreement (b) The Corporation shall not be obligated to effect the filing of a registration statement pursuant to Section 3.1(a) hereof (i) if the Corporation has furnished to ValueAct, within 30 days after receipt of a Registration Request an opinion of counsel (in form and substance reasonably satisfactory to ValueAct) to the Corporation to the effect that ValueAct may effect the sale and distribution of shares of Class A Stock held by ValueAct included in the Registration Request in accordance with its intended method of distribution without the registration of such securities under the 1933 Act; or (ii) if the Corporation has furnished to ValueAct within 30 days after receipt of a Registration Request a certificate signed by an executive officer of the Corporation stating that, in the good faith judgment of the Board such registration would require premature disclosure of material information relating to a pending corporate development or a special audit of the Corporation, in which event the Corporation shall have the right to defer the obligations contained in this Section 3.1 for a period of not more than 165 days (including the time period used for filing the applicable registration statement) after receipt of the Registration Request, and provided that the Corporation has not, in any twelve-month period, utilized the right in this clause (ii) more than once. Section 3.2. Corporation Registration. (a) If the Corporation proposes to register any of its capital stock or other equity securities (including any securities convertible into or exchangeable for equity securities) under the 1933 Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-8 or any successor form relating solely to the sale of securities to participants in a Corporation Class A Stock plan, or a registration on Form S-4 or any successor form), the Corporation shall, at such time, promptly give ValueAct written notice of such registration. Upon the written request of ValueAct given within 20 days after the receipt of such notice by the Corporation, the Corporation shall, subject to the provisions of Section 3.2(b), use commercially reasonable efforts to cause a registration statement covering all of the shares of Class A Stock that ValueAct has requested to be registered to become effective under the 1933 Act. The Corporation shall have no obligation under this Section 3.2 to make any offering of its securities or to complete any offering of its securities that it proposes to make, and shall incur no liability to ValueAct for its failure to do so. (b) In connection with any offering involving an underwriting of securities being issued by the Corporation, the Corporation shall not be required under this Section 3.2 to include any of the securities of the Corporation owned by ValueAct in such underwriting unless it accepts the terms of the underwriting as agreed upon between the Corporation and the underwriters selected by it, and then only in such quantity, if any, as will not, in the reasonable opinion of the underwriters, jeopardize the success of the offering by the Corporation. If the managing underwriter for the offering shall advise the Corporation in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Corporation shall so advise ValueAct, and the number of shares that may be included in the underwriting shall be allocated in priority as follows: (i) all shares of Class A Stock proposed to be underwritten on behalf of the Corporation, and then (ii) all shares of Class A Stock required to be registered on behalf of other -4- stockholders of the Corporation pursuant to the Stockholders Agreement, and then (iii) all shares of Class A Stock proposed to be underwritten on behalf of ValueAct. Section 3.3. Expenses of Registration. The Corporation shall bear and pay all expenses other than underwriting fees, discounts and commissions relating to shares of Class A Stock incurred in connection with each registration, filing or qualification pursuant to this Article III, including (without limitation) all registration, blue sky, securities exchange or listing fees (including NYSE, NASD and similar fees), filing and qualification fees, printing and accounting fees (including for audits and comfort letters), fees and disbursements of counsel for the Corporation; provided, however, that the Corporation shall not be required to pay for any expenses of any registration proceeding begun at the request of ValueAct if the registration request is subsequently withdrawn at any time at the request of ValueAct, in which case ValueAct shall bear such expenses (including all out-of-pocket expenses and fees incurred by the Corporation), unless ValueAct agrees to forfeit one Form S-3 registration. If ValueAct withdraws a registration request after the filing of the applicable registration statement, ValueAct, shall reimburse all such expenses and fees and shall also forfeit such applicable registration right, provided, however, that if such withdrawal is due primarily to (i) the Corporation's failure to comply in all material respects with its obligations under Sections 3.1 through 3.5, or (ii) the failure of the Corporation at a reasonable time, in light of the circumstances, prior to the filing of such registration statement to advise ValueAct, of its knowledge of the existence of an event relating to the Corporation that would reasonably be expected to have a material effect on the business, financial condition or market valuation of the Corporation, such registration right shall not be forfeited. Underwriting discounts and commissions relating to the shares of Class A Stock included in a registration pursuant Section 3.2 shall be borne and paid ratably by ValueAct in proportion to its participation in such registration. Section 3.4. Furnishing of Information. It shall be a condition precedent to the obligations of the Corporation to take any action pursuant to this Article III that ValueAct shall have furnished to the Corporation such information as the Corporation shall request regarding ValueAct, the shares of Class A Stock held by ValueAct, and the intended method of disposition of such shares of Class A Stock as shall be required to effect the requested registration, and that ValueAct shall have provided the Corporation with such representations and warranties, covenants and opinions as are customary for a selling Class A Stockholder in connection with the registration of a selling Class A Stockholder's securities. The Corporation shall provide ValueAct with copies of all correspondence with the Securities and Exchange Commission related to any registration statement filed pursuant to this Article III and in which ValueAct is participating on a reasonably prompt basis. Section 3.5. Indemnification. In the event that any Class A Stock of ValueAct is included in a registration statement under this Article III, ValueAct and the Corporation shall agree to customary indemnification provisions (which may include indemnification of any underwriter of such registration) in connection therewith relating to compliance with the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law in connection with any matter relating to such registration statement. Section 3.6. Additional Registration Rights. In the event that the Corporation shall grant to any stockholder of the Corporation registration rights (other than those contained in -5- the Stockholders' Agreement), the Corporation shall provide written notice of such grant to ValueAct. ARTICLE IV ARBITRATION Section 4.1. Dispute Resolution. To the fullest extent permitted by the Delaware Act and other applicable law, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration in accordance and to the extent permitted by the Uniform Arbitration Act (10 Del. C. Section 5701, et seq.) and, to the extent not inconsistent therewith, the then-prevailing Rules for Non-Administered Arbitration of Business Disputes of the CPR Center for Dispute Resolution. Each party to the arbitration shall select one (1) arbitrator. The arbitrators' ruling shall be binding and conclusive upon the parties hereto to the fullest extent permitted by law. Any arbitration shall occur in Wilmington, Delaware, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. The arbitrators shall be governed by and shall apply the substantive law of the State of Delaware in making their award. The expenses of the arbitration shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the cost of its own experts, evidence and legal counsel. ARTICLE V MISCELLANEOUS Section 5.1. Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be delivered, or mailed by registered or certified mail, as follows: (a) if given to the Corporation, at the following address: Martha Stewart Living Omnimedia, Inc. 20 West 43rd Street New York, New York 10036 Attention: General Counsel with a copy to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Andrew J. Nussbaum, Esq. (b) if given to Stewart or ValueAct, at the address on file with the Corporation, or at such other address as Stewart or ValueAct may hereafter designate by written notice to the Corporation. All such notices shall be deemed to have been given when received. -6- Section 5.2. Amendments. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against any party hereto unless such modification, amendment or waiver is approved in writing by each party hereto. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party there- after to enforce each and every provision of this Agreement in accordance with its terms. Section 5.3. Failure to Pursue Remedies. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation. Section 5.4. Specific Performance. The parties hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement. Any remedy under this Section 5.4 is subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought. Section 5.5. Cumulative Remedies. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. Section 5.6. Binding Effect. This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors, legal representatives and assigns. Section 5.7. Interpretation. Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. All references herein to "Articles," "Sections" and "Paragraphs" shall refer to corresponding provisions of this Agreement. Section 5.8. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. Section 5.9. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one instrument Section 5.10. Integration. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and, except as otherwise provided herein, supersedes all prior agreements and understandings pertaining thereto. Section 5.11. Governing Law. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. -7- Section 5.12. Term. Except as otherwise provided herein, the registration rights provided for in this Agreement shall terminate at such time as ValueAct is able to sell all of its shares of Class A Stock beneficially owned by it in one transaction pursuant to Rule 144 under the 1933 Act. -8- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above stated. MARTHA STEWART LIVING OMNIMEDIA, INC. By: /s/ Greg Blatt Name: Greg Blatt Title: Executive Vice President & General Counsel VALUEACT CAPITAL PARTNERS, L.P. By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Managing Partner VALUEACT CAPITAL PARTNERS II, L.P. By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Managing Partner VALUEACT CAPITAL INTERNATIONAL, LTD. By: /s/ Jeffrey W. Ubben Name: Jeffrey W. Ubben Title: Managing Partner For purposes of Article I, Section 2.3 and Article V hereof only. THE MARTHA STEWART FAMILY LIMITED PARTNERSHIP, L.P. By: /s/ Martha Stewart Name: Martha Stewart Title: General Partner -9- EX-21.0 5 y58396ex21-0.txt LIST OF SUBSIDIARIES EXHIBIT 21 List of Subsidiaries -------------------- Name Country/State of Incorporation - ---- ------------------------------ MSO IP Holdings, Inc. California EX-99.1 6 y58396ex99-1.txt LETTER OF MARTHA STEWART LIVING OMNIMEDIA, INC Exhibit 99.1 MARTHA STEWART LIVING OMNIMEDIA, INC. 11 WEST 42ND STREET NEW YORK, NY 10036 LETTER TO COMMISSION PURSUANT TO TEMPORARY NOTE 3T March 26, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0408 Ladies and Gentlemen: Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, Martha Stewart Living Omnimedia, Inc. has obtained a letter of representation from Arthur Andersen LLP ("Andersen") stating that the December 31, 2001 audit was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Andersen is not relevant to this audit. Very truly yours, Martha Stewart Living Omnimedia, Inc. /s/ James Follo James Follo EVP, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


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

		For the fiscal year ended: December 31, 2001

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

		For the transition period from to


Delaware		52-2187059
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


TABLE OF CONTENTS
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Markets for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosure about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND OTHER FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
INVESTMENT AGREEMENT
LIST OF SUBSIDIARIES
LETTER OF MARTHA STEWART LIVING OMNIMEDIA, INC


Item 1.	Business	2
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	11
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
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 Disclosure	12
Item 10.	Directors and Executive Officers of the Registrant	12
Item 11.	Executive Compensation	12
Item 12.	Security Ownership of Certain Beneficial Owners and Management	12
Item 13.	Certain Relationships and Related Transactions	12
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	12
Signature Page		15
Index to Consolidated Financial Statements, Financial Statement Schedules and Other Financial Information		F-1
Selected Financial Data		F-2
Management’s Discussion and Analysis of Financial Condition and Results of Operations		F-3
Report of Independent Public Accountants		F-7
Consolidated Statements of Income for each year in the three-year period ended December 31, 2001		F-8
Consolidated Balance Sheets at December 31, 2001 and 2000		F-9
Consolidated Statements of Shareholders’ Equity for each year in the three-year period ended December 31, 2001		F-10
Consolidated Statements of Cash Flows for each year in the three-year period ended December 31, 2001		F-11
Notes to Consolidated Financial Statements		F-12
Financial Statement Schedule: II — Valuation and Qualifying Accounts for each year in the three-year period ended December 31, 2001		F-24


		Approximate Area
Location	Use	in Square Feet

11 West 42nd Street, New York, New York	Principal executive and administrative offices; publishing offices; and sales offices		73,383

19 Newtown Turnpike, Westport, Connecticut	Executive and administrative offices for Television, including the television studio and production facilities; and sales offices for television		30,523

601 West 26th Street, New York, New York	Internet development studio, product design facilities, photography studio, test kitchens, and prop storage		149,421


	Q1 2000		Q2 2000		Q3 2000		Q4 2000		Q1 2001		Q2 2001		Q3 2001		Q4 2001

High Sales Price	$	30.19	$	25.94	$	34.81	$	29.50	$	27.56	$	23.10	$	23.50	$	19.52
Low Sales Price	$	21.13	$	13.06	$	21.06	$	17.25	$	17.11	$	15.12	$	12.10	$	13.49


Exhibit
Number			Exhibit Title

	3.1	—	Martha Stewart Living Omnimedia, Inc.’s Certificate of Incorporation.*
	3.2	—	Martha Stewart Living Omnimedia, Inc.’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	—	Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/ Stock Option Plan.*†
	10.5	—	Form of Employment Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and Martha Stewart.*†
	10.6	—	Form of Intellectual Property License and Preservation Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and Martha Stewart.*
	10.7	—	Form of Location Rental Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and Martha Stewart.*
	10.8	—	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.*
	10.9	—	Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.*
	10.10	—	Lease, dated August 20, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC.*
	10.10.1	—	First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc.**
	10.11	—	Lease, dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia, Inc.****
	10.12	—	License Agreement, dated June 21, 2001 by and between Kmart Corporation and MSO IP Holdings, Inc.****
	10.13	—	Severance Agreement, dated September 23, 1999, by and between Martha Stewart Living Omnimedia LLC and Sharon Patrick.*†
	10.14.1	—	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.†*****
	10.14.2	—	Amendment, dated January 28, 2002, to Split-Dollar Life Insurance Agreement, dated February 28, 2001, by and between Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited Partnership.†
	10.15	—	Investment Agreement, dated as of January 8, 2002, by and among Martha Stewart Living Omnimedia, Inc., The Martha Stewart Family Limited Partnership, L.P., ValueAct Capital Partners, L.P., ValueAct Capital Partners II, L.P. and ValueAct Capital International, Ltd.
	21.0	—	List of Subsidiaries.
	99.1	—	Letter of Martha Stewart Living Omnimedia, Inc., addressed to the Securities and Exchange Commission, regarding representations to Martha Stewart Living Omnimedia, Inc. from Arthur Andersen LLP.


Signature		Title


/s/ MARTHA STEWART Martha Stewart		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

/s/ SHARON PATRICK Sharon Patrick		President, Chief Operating Officer and Director

/s/ JAMES FOLLO James Follo		Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ ARTHUR C. MARTINEZ Arthur C. Martinez		Director

/s/ DARLA D. MOORE Darla D. Moore		Director

/s/ NAOMI O. SELIGMAN Naomi O. Seligman		Director

/s/ JEFFREY W. UBBEN Jeffrey W. Ubben		Director


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 in the period ended December 31, 2001	F-8
	Consolidated Balance Sheets at December 31, 2001 and 2000	F-9
	Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2001	F-10
	Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001	F-11
	Notes to Consolidated Financial Statements	F-12
Financial Statement Schedule:
	II — Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2001	F-24


			2001			2000			1999			1998			1997(3)


			(in thousands except per share data)
INCOME STATEMENT DATA
REVENUES
	Publishing		$	181,708		$	179,218		$	145,520		$	127,020		$	108,694
	Television			29,522			32,464			30,590			23,351			12,396
	Merchandising			35,572			24,345			20,200			15,004			6,919
	Internet/ Direct Commerce			48,825			49,739			36,004			14,673			4,812

Total revenues				295,627			285,766			232,314			180,048			132,821

Income from operations				34,079			31,707			22,322			27,385			16,591

Net income				21,906			21,278			25,569			23,806			13,929

Pro forma net income(1)			$	21,906		$	21,278		$	11,692		$	12,989		$	6,891

PER SHARE DATA
	Earnings per share
		Basic	$	.45		$	.44
		Diluted	$	.45		$	.43
	Weighted average common shares Outstanding
		Basic		48,639			48,678
		Diluted		49,039			49,623
FINANCIAL POSITION
	Cash and cash equivalents		$	141,162		$	127,425		$	154,749		$	24,578		$	9,971
	Total assets			311,621			297,414			281,771			125,372			105,706
	Long-term debt			—			—			—			27,650			30,000
	Shareholders’ equity			222,192			196,116			199,402			36,815			13,235
OTHER FINANCIAL DATA
EBITDA(2)			$	46,844		$	40,797		$	28,882		$	32,919		$	20,518
Cash flow from operating activities				19,389			39,538			28,304			17,524			44,573
Cash flow used in investing activities				(8,059	)		(38,068	)		(6,298	)		(341	)		(12,896	)
Cash flow from (used in) financing activities				2,407			(28,794	)		108,165			(2,576	)		(21,791	)


	*Comparison of Year Ended December 31, 2001, to Year Ended December 31, 2000*


		2001			2000


		(In thousands except
		per share data)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents	$	141,162		$	127,425
	Accounts receivable, net		45,629			48,993
	Inventories		12,952			9,433
	Deferred television production costs		3,627			3,949
	Other current assets		7,772			6,013

	Total current assets		211,142			195,813

PROPERTY, PLANT AND EQUIPMENT, net			45,423			37,349

INTANGIBLE ASSETS, net			49,340			47,207

OTHER NONCURRENT ASSETS, net			5,716			17,045

	Total assets	$	311,621		$	297,414

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Accounts payable and accrued liabilities	$	40,649		$	48,340
	Accrued payroll and related costs		5,988			7,190
	Income taxes payable		—			2,590
	Current portion of deferred subscription income		28,724			28,782

	Total current liabilities		75,361			86,902

DEFERRED SUBSCRIPTION INCOME			9,071			8,614

OTHER NONCURRENT LIABILITIES			4,997			5,782

	Total liabilities		89,429			101,298

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
	Class A common stock, $.01 par value, 350,000 shares authorized: 15,160 and 14,559 shares issued in 2001 and 2000, respectively		152			146
	Class B common stock, $.01 par value, 150,000 shares authorized; 33,619 and 33,888 shares outstanding in 2001 and 2000, respectively		336			339
	Capital in excess of par value		173,470			168,528
	Retained earnings		49,009			27,103
	Less Class A treasury stock — 59 shares at cost		(775	)		—

	Total shareholders’ equity		222,192			196,116

	Total liabilities and shareholders’ equity	$	311,621		$	297,414



				Class A						Class B									Class A
				Common Stock						Common Stock						Capital in			Treasury Stock
	Members’															Excess of									Retained
	Equity			Shares			Amount			Shares			Amount			Par Value			Shares			Amount			Earnings		Total


	(In thousands)
Balance at January 1, 1999	$	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
Issuance of shares for employee benefit plans and stock options		—			441			5			—			—			3,704									—		3,709
Repurchase and retirement of common stock		—			(1,366	)		(14	)		—			—			(32,489	)								—		(32,503	)
Shares returned on net treasury basis		—			—			—			(239	)		(2	)		2									—		—
Tax benefit from exercise of stock options		—			—			—			—			—			4,230									—		4,230

Balance at December 31, 2000		—			14,559			146			33,888			339			168,528									27,103		196,116
Net income																										21,906		21,906
Conversion of shares		—			269			3			(269	)		(3	)		—									—		—
Issuance of shares for employee benefit plans and stock options		—			332			3			—			—			3,179									—		3,182
Repurchase of common stock		—			—			—			—			—			—			(59	)		(775	)		—		(775	)
Tax benefit from exercise of stock options		—			—			—			—			—			1,763			—			—			—		1,763

Balance at December 31, 2001		—			15,160		$	152			33,619		$	336		$	173,470			(59	)	$	(775	)	$	49,009	$	222,192


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


	2001		2000

Advertising	$	31,337	$	33,645
Newsstand		2,236		3,518
Licensing		9,122		7,172
Other		7,434		9,024

		50,129		53,359
Less: reserve for credits and uncollectible accounts		4,500		4,366

	$	45,629	$	48,993


	Liquidity and Capital Resources


		Number			Weighted average
		of 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
Exercised			(155,270	)		0.60
Cancelled			(143,781	)		0.60

Outstanding as of December 31, 2001			1,375,938		$	0.63

Options exercisable at:
	December 31, 1999		647,815		$	0.63
	December 31, 2000		753,545		$	0.62
	December 31, 2001		836,975		$	0.61


		Number			Weighted average
		of 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
Granted			2,512,900			16.52
Exercised			(173,793	)		17.33
Cancelled			(1,045,911	)		15.87

Outstanding as of December 31, 2001			7,795,967		$	17.74

Options exercisable at:
	December 31, 1999		—			—
	December 31, 2000		1,059,243		$	17.97
	December 31, 2001		2,292,420		$	18.17


		2001		2000			1999

CURRENT INCOME TAXES
	Federal	$	12,152	$	12,292		$	60
	State and local		3,372		4,190			555
	Foreign		423		376			463

Total current income tax expense			15,947		16,858			1,078

DEFERRED INCOME TAXES (BENEFIT)
	Federal		81		(640	)		(2,900	)
	State and local		27		(220	)		(925	)

Total deferred income tax expense (benefit)			108		(860	)		(3,825	)

Income tax provision (benefit)		$	16,055	$	15,998		$	(2,747	)


	2001		2000

Paper	$	4,526	$	4,151
Product merchandise		8,426		5,282

	$	12,952	$	9,433


	2001		2000

Studios and equipment	$	6,765	$	6,765
Furniture, fixtures and equipment		9,714		8,562
Computer hardware and software		31,191		15,628
Leasehold improvements		20,361		19,424

		68,031		50,379
Less: accumulated depreciation and amortization		22,608		13,030

	$	45,423	$	37,349


		2001			2000

	Computed tax at the federal statutory rate of 35%	$	13,286		$	13,047
	State income taxes, net of federal benefit		2,209			2,581
	Non-deductible goodwill amortization		965			965
	Non-deductible expense		25			315
	Non-taxable interest income		(430	)		(910	)

Provision for income taxes		$	16,055		$	15,998

Effective tax rate			42.3	%		42.9	%


		2001			2000

DEFERRED TAX ASSETS
	Inventory obsolescence reserves	$	1,213		$	1,457
	Provision for doubtful accounts		1,000			1,087
	Accrued rent		1,159			949
	Reserve for newsstand returns		1,294			743
	Accrued compensation		82			603
	Other		345			428

	Total deferred tax assets		5,093			5,267

DEFERRED TAX LIABILITIES
	Depreciation and amortization		(26	)		(407	)

	Total deferred tax liabilities		(26	)		(407	)

NET DEFERRED TAX ASSET		$	5,067		$	4,860


	Capitalized		Operating
	Leases		Leases

2002	$	2,406	$	8,231
2003		483		8,345
2004		—		8,509
2005		—		8,602
2006		—		8,183
Thereafter		—		28,696

Total minimum lease payments		2,889	$	70,566

Imputed interest		174

Present value of minimum capitalized lease payments		2,715
Current portion		2,243

Long-term capitalized lease obligation	$	472


								Internet/Direct			Corporate
		Publishing		Television		Merchandising		Commerce			Charges			Consolidated

2001
	Revenues	$	181,708	$	29,522	$	35,572	$	48,825			—		$	295,627
	Income (loss) from operations		66,138		2,674		29,861		(27,015	)		(37,579	)		34,079
	Depreciation and amortization		158		1,824		633		2,236			7,914			12,765
	Total assets		32,083		17,674		8,265		32,039			221,560			311,621
	Capital expenditures		136		31		104		13,852			3,160			17,283
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


	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
Year ended December 31, 2001
Revenues	$	71,245	$	69,690	$	69,635	$	85,058	$	295,627
Income from operations		9,408		7,869		7,354		9,448		34,079
Net income		6,208		5,199		4,769		5,730		21,906
EARNINGS PER SHARE
Basic	$	.13	$	.11	$	.10	$	.12	$	.45
Diluted	$	.13	$	.11	$	.10	$	.12	$	.45
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		48,516		48,608		48,727		48,703		48,639
Diluted		49,176		49,081		49,022		48,824		49,039


			Additions
	Balance,		Charged to
	Beginning		Costs and					Balance, End
Description	of Year		Expenses			Deductions		of Year


	(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
YEARS ENDED DECEMBER 31,
2001	$	2,199	$	717		$	823	$	2,093
2000		1,937		1,196			934		2,199
1999		1,202		1,572			837		1,937
RESERVE FOR AUDIENCE UNDER DELIVERY:
YEARS ENDED DECEMBER 31,
2001		2,167		1,834			2,028		1,973
2000		4,166		(846	)		1,153		2,167
1999		4,803		2,159			2,796		4,166