-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NeHnb5YdcoaVnfnw3a0pZTAcb1SwbsElEXl+Xhl/rmCw+9v6W5b66m5IUZjdKvU7 WYLIhOlFpAPkHrF+Q+ZLeg== 0000950123-03-012780.txt : 20031114 0000950123-03-012780.hdr.sgml : 20031114 20031114170111 ACCESSION NUMBER: 0000950123-03-012780 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 522187059 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15395 FILM NUMBER: 031005698 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 MAIL ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 10-Q 1 y91721e10vq.txt MARTHA STEWART LIVING OMNIMEDIA, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 Commission file number 001-15395 Martha Stewart Living Omnimedia, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 52-2187059 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 11 West 42nd Street, New York, NY 10036 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 827-8000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding as of November 10, 2003 Class A, $0.01 par value 19,562,402 Class B, $0.01 par value 30,058,975 ---------- Total 49,621,377 ==========
Martha Stewart Living Omnimedia, Inc. Index to Form 10-Q
Page ---- Part I. Financial information Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 4. Controls and Procedures 22 Part II. Other Information Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25
-2- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Balance Sheets (in thousands, except per share amounts)
September 30, December 31, 2003 2002 --------- --------- ASSETS (unaudited) CURRENT ASSETS Cash and cash equivalents $ 141,666 $ 131,664 Short-term investments 33,730 47,286 Accounts receivable, net 25,958 37,796 Inventories, net 9,666 8,654 Deferred television production costs 4,060 4,179 Income taxes receivable 5,334 -- Deferred income taxes 7,028 7,028 Other current assets 5,874 4,756 --------- --------- TOTAL CURRENT ASSETS 233,316 241,363 --------- --------- PROPERTY, PLANT AND EQUIPMENT, net 26,217 31,288 INTANGIBLE ASSETS, net 44,257 44,257 DEFERRED INCOME TAXES 2,827 2,827 OTHER NONCURRENT ASSETS 4,575 4,807 --------- --------- TOTAL ASSETS $ 311,192 $ 324,542 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 38,290 $ 40,517 Accrued payroll and related costs 9,243 9,385 Income taxes payable -- 323 Current portion of deferred subscription income 22,744 24,932 --------- --------- TOTAL CURRENT LIABILITIES 70,277 75,157 DEFERRED SUBSCRIPTION INCOME 6,653 7,715 OTHER NONCURRENT LIABILITIES 4,454 5,035 --------- --------- TOTAL LIABILITIES 81,384 87,907 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 19,517 and 19,342 shares outstanding in 2003 and 2002, respectively 195 194 Class B common stock, $.01 par value, 150,000 shares authorized; 30,059 and 30,295 outstanding in 2003 and 2002, respectively 301 303 Capital in excess of par value 181,705 181,629 Unamortized restricted stock (480) (993) Retained earnings 48,862 56,277 --------- --------- 230,583 237,410 Less: Class A treasury stock - 59 shares at cost (775) (775) --------- --------- TOTAL SHAREHOLDERS' EQUITY 229,808 236,635 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 311,192 $ 324,542 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. -3- Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Income Statements (unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------- -------- --------- --------- REVENUES Publishing $ 29,147 $ 46,515 $ 102,825 $ 136,932 Television 6,579 6,362 19,782 20,323 Merchandising 8,852 10,060 30,943 37,110 Internet/Direct Commerce 6,602 7,994 21,436 23,127 -------- -------- --------- --------- TOTAL REVENUES 51,180 70,931 174,986 217,492 -------- -------- --------- --------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 31,212 38,853 101,255 115,005 Selling and promotion 12,047 11,073 39,647 33,411 General and administrative 12,216 13,689 40,218 36,715 Depreciation and amortization 1,885 2,841 6,080 8,976 -------- -------- --------- --------- TOTAL OPERATING COSTS AND EXPENSES 57,360 66,456 187,200 194,107 -------- -------- --------- --------- OPERATING INCOME (LOSS) (6,180) 4,475 (12,214) 23,385 Interest income, net 293 545 1,090 1,603 -------- -------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (5,887) 5,020 (11,124) 24,988 Income tax benefit (provision) 2,169 (2,058) 4,353 (10,245) -------- -------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (3,718) 2,962 (6,771) 14,743 Loss from discontinued operations, net of tax benefit (122) (197) (644) (2,336) -------- -------- --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (3,840) 2,765 (7,415) 12,407 Cumulative effect of accounting change, net of tax benefit -- -- -- (3,137) -------- -------- --------- --------- NET INCOME (LOSS) $ (3,840) $ 2,765 $ (7,415) $ 9,270 ======== ======== ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Income Statements (continued) (unaudited, in thousands, except per share amounts) INCOME (LOSS) PER SHARE - BASIC AND DILUTED Income (loss) from continuing operations $ (0.08) $ 0.06 $ (0.14) $ 0.30 ---------- ---------- ---------- ---------- Loss from discontinued operations (0.00) (0.00) (0.01) (0.05) ---------- ---------- ---------- ---------- Cumulative effect of accounting change -- -- -- (0.06) Net income (loss) $ (0.08) $ 0.06 $ (0.15) $ 0.19 ---------- ---------- ---------- ---------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 49,537 49,209 49,553 49,050 ---------- ---------- ---------- ---------- Diluted 49,537 49,316 49,553 49,205 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. -5- Martha Stewart Living Omnimedia, Inc. Consolidated Statement of Shareholders' Equity For the Nine Months Ended September 30, 2003 (unaudited, in thousands)
Capital in Class A Class B Excess of Unamortized Class A Common Stock Common Stock Par Restricted Retained Treasury stock Shares Amount Shares Amount Value Stock Earnings Shares Amount Total ------ ------ ------ ------ ----- ----- -------- ------ ------ ----- Balance at 19,342 $ 194 30,295 $ 303 $181,629 $ (993) $56,277 (59) $ (775) $236,635 January 1, 2003 Net loss for the period - - - - - - (7,415) - - (7,415) Issuance of shares for stock option exercises 190 1 - - 176 - - - - 177 Shares returned on net treasury basis - - (236) (2) 2 - - - - - Return of restricted stock (15) - - - (102) 102 - - - - Amortization of restricted stock - - - - - 411 - - - 411 ------ ----- ------ ----- -------- ------ ------- --- ------ -------- Balance at September 30, 2003 19,517 $ 195 30,059 $ 301 $181,705 $ (480) $ 48,862 (59) $ (775) $229,808 ====== ===== ====== ===== ======== ====== ======= === ====== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. -6- Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Statements of Cash Flows (unaudited, in thousands)
Nine Months Ended September 30, ------------------------ 2003 2002 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (7,415) $ 9,270 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of accounting change -- 3,137 Depreciation and amortization 6,080 8,976 Amortization of restricted stock 411 -- Changes in operating assets and liabilities (1,799) 7,559 --------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,723) 28,942 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,008) (3,452) Purchases of short-term investments -- (42,392) Sales of short-term investments 13,556 31,200 --------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,548 (14,644) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received from stock option exercises 177 4,041 --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 177 4,041 --------- -------- NET INCREASE IN CASH 10,002 18,339 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 131,664 68,076 --------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 141,666 $ 86,415 ========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements. -7- Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) 1. Accounting policies a. General Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as the "Company." The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to its fiscal year ended December 31, 2002. b. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company's consolidated financial statements. c. Income taxes The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. d. Reclassifications The prior year periods have been restated to reflect as discontinued operations the results of the operations discussed in Note 5. e. Intangible assets Commencing January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets". Under SFAS No. 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 Company completed the initial impairment tests in the second quarter of 2002 which resulted in a charge of $5,039 ($3,137 net of income taxes) to reduce the carrying value of its goodwill related to The Wedding List. In accordance with the SFAS 142 transition rules, we have presented these amounts in the first quarter of 2002. The remaining intangible assets represent goodwill of the Publishing segment and its fair value exceeds the carrying value. -8- f. Stock Compensation 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 for the three month period ended September 30, :
2003 2002 -------- ------- risk-free interest rates 3.60% 4.11% dividend yields zero zero expected volatility 140% 134% expected option life 6 years 6 years average fair market value per option granted $ 7.38 $ 6.30
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options over the relevant vesting periods. The pro forma effect on net income (loss), as reported for the three and nine month periods ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 2003 2002 2003 2002 ------- ------- -------- ------- Net income (loss), as reported $(3,840) $ 2,765 $ (7,415) $ 9,270 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,535) (2,464) (7,594) (7,072) ------- ------- -------- ------- Pro forma net income (loss) $(6,375) $ 301 $(15,009) $ 2,198 ======= ======= ======== ======= Income (loss) per share: Basic and diluted - as reported $ (0.08) $ 0.06 $ (0.15) $ 0.19 Basic and diluted - pro forma $ (0.13) $ 0.01 $ (0.31) $ 0.04
-9- 2. Inventories The components of inventories are as follows:
September 30, December 31, 2003 2002 ------------- ----------- Paper $ 5,774 $ 4,861 Product merchandise 7,156 8,887 ------- ------- 12,930 13,748 Less: reserve for obsolete and excess inventory 3,264 5,094 ------- ------- $ 9,666 $ 8,654 ======= =======
3. Earnings (loss) per share Earnings (loss) per share are computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during each period. Diluted earnings (loss) per share include the determinants of basic earnings (loss) per share and, in addition, give effect to potentially dilutive common shares. 4. Industry segments 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 and newspaper businesses. The Television segment consists of the Company's television production operations that produce television programming that airs in syndication in the United States and on cable in the United States, Canada and Japan. The Merchandising segment primarily consists of the Company's operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners under Company trademarks in exchange for royalty income. The Internet/Direct Commerce segment comprises the Company's operations relating to its catalog, Martha Stewart: The Catalog For Living, and the website marthastewart.com. The following presents segment and consolidated financial information for the three and nine month periods ended September 30, 2003 and 2002, including a reconciliation of operating income, a GAAP measure, and Operating Income before Depreciation and Amortization (OIDA), a non-GAAP measure. The Company believes OIDA is an appropriate measure when evaluating the operating performance of its business segments and the Company on a consolidated basis. OIDA is used externally by the Company's investors, analysts, and industry peers. OIDA is among the primary metrics used by management for planning and forecasting of future periods, and is considered an important indicator of the operational strength of the Company's businesses. The Company believes the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by the Company's management and makes it easier to compare the Company's results with other companies that have different capital structures or tax rates. The Company believes OIDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss), cash flows, and other measures of financial performance prepared in accordance with generally accepted accounting principles ("GAAP"). As OIDA is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similarly titled measures employed by other companies. In order to reconcile OIDA to operating income, depreciation and amortization are added back to operating income. -10-
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- OPERATING INCOME (LOSS) Publishing $ 1,395 $ 15,295 $ 15,702 $ 47,038 Television (34) 1,117 195 2,409 Merchandising 4,561 6,037 19,406 25,826 Internet/Direct Commerce (1,970) (6,660) (14,775) (21,478) -------- -------- -------- -------- Operating Income before Corporate Overhead 3,952 15,789 20,528 53,795 Corporate Overhead (10,132) (11,314) (32,742) (30,410) -------- -------- -------- -------- TOTAL OPERATING INCOME (LOSS) (6,180) 4,475 (12,214) 23,385 -------- -------- -------- -------- DEPRECIATION AND AMORTIZATION Publishing 41 40 123 119 Television 236 417 1,015 1,287 Merchandising 168 158 503 475 Internet/Direct Commerce 235 741 727 2,121 Corporate Overhead 1,205 1,485 3,712 4,974 -------- -------- -------- -------- TOTAL DEPRECIATION AND AMORTIZATION 1,885 2,841 6,080 8,976 -------- -------- -------- -------- OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION Publishing 1,436 15,335 15,825 47,157 Television 202 1,534 1,210 3,696 Merchandising 4,729 6,195 19,909 26,301 Internet/Direct Commerce (1,735) (5,919) (14,048) (19,357) -------- -------- -------- -------- Operating Income before Depreciation and Amortization and before Corporate Overhead 4,632 17,145 22,896 57,797 Corporate Overhead (8,927) (9,829) (29,030) (25,436) -------- -------- -------- -------- TOTAL OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION $ (4,295) $ 7,316 $ (6,134) $ 32,361 ======== ======== ======== ========
-11- 5. Discontinued Operations In June 2002, the Company decided to exit The Wedding List, a wedding registry and gift business that was reported within the Internet/Direct Commerce business segment. All prior period financial statements were restated to report the operations as a discontinued operation. Summary operating results for The Wedding List were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------- --------------------- 2003 2002 2003 2002 ----- ----- ------- ------- Revenues $ (55) $ 727 $ 526 $ 1,978 ----- ----- ------- ------- Operating loss before income tax benefit (202) (334) (1,025) (3,960) ----- ----- ------- ------- Loss from discontinued operations, net of tax benefit $(122) $(197) $ (644) $(2,336) ===== ===== ======= =======
6. Supplemental cash flow information:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Cash paid for interest - $ 41 $ 15 $ 140 Cash paid for income taxes - 385 1,529 4,614
-12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart Living Omnimedia, Inc., and its subsidiaries. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THREE MONTHS ENDED SEPTEMBER 30, 2002
Three Months Ended September 30, ----------------------- 2003 2002 -------- -------- REVENUES Publishing $ 29,147 $ 46,515 Television 6,579 6,362 Merchandising 8,852 10,060 Internet/Direct Commerce 6,602 7,994 -------- -------- TOTAL REVENUES 51,180 70,931 -------- -------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 31,212 38,853 Selling and promotion 12,047 11,073 General and administrative 12,216 13,689 Depreciation and amortization 1,885 2,841 -------- -------- TOTAL OPERATING COSTS AND EXPENSES 57,360 66,456 -------- -------- OPERATING INCOME (LOSS) (6,180) 4,475 Interest income, net 293 545 -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (5,887) 5,020 Income tax benefit (provision) 2,169 (2,058) -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS (3,718) 2,962 -------- -------- Loss from discontinued operations, net of tax benefit (122) (197) -------- -------- NET INCOME (LOSS) $ (3,840) $ 2,765 ======== ========
-13- Revenues. Total revenues decreased $19.8 million, or 27.8%, to $51.2 million for the quarter ended September 30, 2003, from $70.9 million for the quarter ended September 30, 2002. Publishing revenues decreased $17.4 million, or 37.3%, to $29.1 million for the quarter ended September 30, 2003, from $46.5 million for the quarter ended September 30, 2002. This decrease was primarily due to lower advertising revenues of $14.0 million and lower circulation revenues of $2.0 million. The decrease in advertising revenues resulted primarily from fewer advertising pages in Martha Stewart Living, as well as the shift in the publication schedule of one issue of Martha Stewart Weddings out of the third quarter and into the second quarter, lower advertising rates in Martha Stewart Living, and the publication of one fewer Special Interest Publication. These declines were partially offset by advertising revenues related to our new publication, Everyday Food. The decrease in circulation revenues primarily resulted from lower subscription revenues from Martha Stewart Living magazine, as well as the change in the publication schedule of Martha Stewart Weddings referred to above, partially offset by circulation revenue from Everyday Food. Television revenues increased $0.2 million, or 3.4%, to $6.6 million for the quarter ended September 30, 2003, from $6.4 million for the quarter ended September 30, 2002. Revenue from our syndicated daily show was flat in the quarter, with lower license fee revenue offset by higher syndicated advertising revenue. The higher syndicated advertising revenue was due to an adjustment to the audience under delivery reserve related to prior seasons. Merchandising revenues decreased $1.2 million, or 12.0%, to $8.9 million for the quarter ended September 30, 2003, from $10.1 million for the quarter ended September 30, 2002, primarily as a result of lower sales of Martha Stewart Everyday branded products at Kmart, resulting in a decrease in royalty revenue of $1.0 million principally due to Kmart store closings, partially offset by an increase in our royalty rate and higher same store sales. The royalty rate under our agreement with Kmart increased 9% on February 1, 2003. Revenue from Kmart represented approximately 85% of total segment revenue in the quarter. Royalty revenues from sales of products at Zellers in Canada was zero in the current period due to the early 2003 expiration of our licensing agreement. Revenue from Zellers in the prior year's period was $0.3 million. In September 2003, we began selling Martha Stewart Everyday products in Canada through an agreement with Sears Canada. These decreases were partially offset by an increase in royalties of $0.3 million earned from sales of Martha Stewart Signature products. Kmart emerged from bankruptcy on May 6th, 2003. While operating under Chapter 11 of the Federal Bankruptcy Code, Kmart closed 283 stores in 2002 and an additional 316 stores in 2003. The Company has recognized royalty revenues earned under our agreement with Kmart based upon actual royalties earned, not contractual minimum amounts. Contractual minimum amounts under our agreement with Kmart are computed on January 31st annually each year and paid shortly thereafter. The Company currently expects earned royalties, which are paid quarterly, to be below the annual minimum amount. We expect to recognize the difference between the minimum royalty amount and royalties paid on actual sales in the fourth quarter of 2003, when the amount can be determined. Internet/Direct Commerce revenues decreased $1.4 million, or 17.4%, to $6.6 million for the quarter ended September 30, 2003, from $8.0 million for the quarter ended September 30, 2002. The decline was attributable to lower advertising revenue of $0.7 million, and lower commerce sales of $0.7 million resulting principally from lower catalog circulation, partially offset by higher online conversion rates. Magazine Publication Schedule
Third Quarter 2003 Third Quarter 2002 ------------------ ------------------ Martha Stewart Living Three Issues Three Issues Martha Stewart Weddings No Issue One Issue Everyday Food Two Issues No Issue Special Interest Publications One Issues Two Issues
Production, distribution and editorial. Production, distribution and editorial expenses decreased $7.6 million, or 19.7%, to $31.2 million for the quarter ended September 30, 2003, from $38.9 million for the quarter ended September 30, 2002. Publishing segment costs decreased $4.5 million primarily due to lower paper, printing and distribution costs resulting from fewer pages printed in the quarter. The reduction in printed pages was primarily attributed to fewer pages printed in Martha Stewart Living magazine, as well as the publication of one fewer Special Interest Publication and the shift in publication of Martha Stewart Weddings from the third quarter into the second quarter. This reduction was partially offset by costs associated with the publication of two issues of Everyday Food. Television segment costs increased $1.4 million, principally related to higher production costs recognized in the period due to higher staffing costs and the prior year benefit of extending a cable television programming agreement which resulted in the recognition of less production costs in the period. Internet/Direct Commerce costs decreased $4.8 million, due to lower cost of goods sold resulting from improved gross margins and the successful disposition of previously written down obsolete and slow moving inventory. The decrease also resulted from lower catalog production costs due to lower circulation in the period, as well as the continued benefit of the first quarter 2003 -14- restructuring, which reduced headcount and lowered technology costs. Selling and promotion. Selling and promotion expenses increased $1.0 million, or 8.8%, to $12.0 million for the quarter ended September 30, 2003, from $11.1 million for the quarter ended September 30, 2002. Publishing segment costs increased $1.1 million, or 11.2%, resulting primarily from marketing and circulation costs relating to Everyday Food, partially offset by lower circulation spending related to Martha Stewart Living. General and administrative. General and administrative expenses decreased $1.5 million, or 10.8%, to $12.2 million for the quarter ended September 30, 2003, from $13.7 million for the quarter ended September 30, 2002. Corporate costs decreased $1.1 million, or 10.8%, principally resulting from lower legal expenses resulting from corporate matters associated with various investigations related to a personal sale of non-Company stock by Martha Stewart, a Director of the Company and its Chief Creative Officer. A substantial portion of legal expenses we are incurring related to these matters are now covered by insurance. This decrease was partially offset by higher compensation and insurance costs. Internet/Direct Commerce segment costs decreased $0.5 million primarily as a result of lower headcount. Depreciation and amortization. Depreciation and amortization decreased $1.0 million, or 33.7%, to $1.9 million for the quarter ended September 30, 2003, from $2.8 million for the quarter ended September 30, 2002. The decrease is primarily due to lower depreciation associated with the Company's website, which was written down by $6.1 million in the fourth quarter of 2002 in connection with a restructuring of the Internet/Direct Commerce segment. Interest income, net. Interest income, net, was $0.3 million for the quarter ended September 30, 2003, compared with $0.5 million for the quarter ended September 30, 2002. Higher average cash balances throughout the quarter were more than offset by lower interest yields on cash and short-term investments. Income tax benefit (provision). Income tax benefit for the quarter ended September 30, 2003 was $2.2 million, representing a 36.8% effective income tax rate, compared to an income tax provision of $2.1 million representing an effective income tax rate of 41.0% for the quarter ended September 30, 2002. The effective income tax rate in the current quarter of 2003 reflects a federal tax rate of 35%, without giving benefit to state income tax carry-backs, but allowing for the benefit of certain book-tax differences. State income tax benefits available to the Company resulting from the carry-back of losses to prior years is limited. Accordingly, the Company has not recognized any state tax benefit for the quarter ended September 30, 2003. Furthermore, no tax benefit has been assumed for state and local loss carry-forwards to future periods. Loss from discontinued operations. Loss from discontinued operations was $0.1 million (net of tax) for the quarter ended September 30, 2003, compared to $0.2 million (net of tax) from the same operations for the quarter ended September 30, 2002. Discontinued operations represent the operations of the Wedding List, which the Company discontinued in 2002. The current period expenses are primarily facility related. Net Income (Loss). Net loss was $(3.8) million for the quarter ended September 30, 2003, compared to a net income of $2.8 million for the quarter ended September 30, 2002, as a result of the above mentioned factors. -15- COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 TO NINE MONTHS ENDED SEPTEMBER 30, 2002
2003 2002 --------- --------- REVENUES Publishing $ 102,825 $ 136,932 Television 19,782 20,323 Merchandising 30,943 37,110 Internet/Direct Commerce 21,436 23,127 --------- --------- TOTAL REVENUES 174,986 217,492 --------- --------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 101,255 115,005 Selling and promotion 39,647 33,411 General and administrative 40,218 36,715 Depreciation and amortization 6,080 8,976 --------- --------- TOTAL OPERATING COSTS AND EXPENSES 187,200 194,107 --------- --------- OPERATING INCOME (LOSS) (12,214) 23,385 Interest income, net 1,090 1,603 --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (11,124) 24,988 Income tax benefit (provision) 4,353 (10,245) --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (6,771) 14,743 --------- --------- Loss from discontinued operations, net of tax benefit (644) (2,336) --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (7,415) 12,407 Cumulative effect of accounting change, net of tax benefit -- (3,137) --------- --------- NET INCOME (LOSS) $ (7,415) $ 9,270 ========= =========
-16- Revenues. Total revenues decreased $42.5 million, or 19.5%, to $175.0 million for the nine months ended September 30, 2003, from $217.5 million for the nine months ended September 30, 2002. Publishing revenues decreased $34.1 million, or 24.9%, to $102.8 million for the nine months ended September 30, 2003, from $136.9 million for the nine months ended September 30, 2002. This decrease was primarily due to lower advertising revenues of $26.7 million, lower circulation revenues of $5.2 million and decreased revenues from our book business of $2.1 million. The decrease in advertising revenue resulted primarily from fewer advertising pages in Martha Stewart Living, as well as lower advertising revenues from Special Interest Publications, and lower advertising rates in Martha Stewart Living. These declines were partially offset by advertising revenues related to a new publication, Everyday Food. The decrease in circulation revenues primarily resulted from lower newsstand and subscription revenues from Martha Stewart Living magazine, partially offset by circulation revenues from Everyday Food magazine. Television revenues decreased $0.5 million, or 2.7%, to $19.8 million for the nine months ended September 30, 2003, from $20.3 million for the nine months ended September 30, 2002. The decrease is primarily attributable to lower licensing fees from our syndicated daily program of $0.7 million. Additionally, the loss of the company's airtime on CBS The Early Show contributed to an additional $0.4 million decline. This reduction was partially offset by higher cable revenues of $0.8 million under existing licensing agreements. The segment also benefited from an adjustment to the audience under delivery reserve of the nationally syndicated daily show, related to prior seasons. Merchandising revenues decreased $6.2 million, or 16.6%, to $30.9 million for the nine months ended September 30, 2003, from $37.1 million for the nine months ended September 30, 2002, primarily as a result of lower sales of Martha Stewart Everyday branded products at Kmart resulting in a decrease in royalty revenue of $6.6 million, principally due to store closings, as well as the elimination of live plants in the Martha Stewart Everyday Garden Line at Kmart and lower same store sales, partially offset by an increase in royalty rate in the current period. The royalty rate under our agreement with Kmart increased 9% on February 1, 2003. Revenue from Kmart represented approximately 85% of total segment revenue for the nine months ended September 30, 2003. Royalty revenues from sales of products at Zellers in Canada was zero in the current period due to the early 2003 expiration of our licensing agreement. Revenue from Zellers in the prior year period was $0.9 million. In September 2003, we began selling Martha Stewart Everyday products in Canada through an agreement with Sears Canada. These decreases were partially offset by an increase in royalties of $1.5 million earned from sales of Martha Stewart Signature products. Kmart emerged from bankruptcy on May 6th, 2003. While operating under Chapter 11 of the Federal Bankruptcy Code, Kmart closed 283 stores in 2002 and an additional 316 stores in 2003. The Company has recognized royalty revenues earned under our agreement with Kmart based upon actual royalties earned, not contractual minimum amounts. Contractual minimum amounts under our agreement with Kmart are computed on January 31st annually each year and paid shortly thereafter. The Company currently expects earned royalties, which are paid quarterly, to be below the annual minimum amount. We expect to recognize the difference between the minimum royalty amount and royalties paid on actual sales in the fourth quarter of 2003, when the amount can be determined. Internet/Direct Commerce revenues decreased $1.7 million, or 7.3%, to $21.4 million for the nine months ended September 30, 2003, from $23.1 million for the nine months ended September 30, 2002 due to lower advertising revenue. Magazine Publication Schedule Nine month period ended September 30
2003 2002 ---- ---- Martha Stewart Living Nine Issues Nine Issues Martha Stewart Weddings Two Issues Two Issues Everyday Food Six Issues None Special Interest Publications Five Issues Five Issues
Production, distribution and editorial. Production, distribution and editorial expenses decreased $13.8 million, or 12.0%, to $101.3 million for the nine months ended September 30, 2003, from $115.0 million for the nine months ended September 30, 2002. Internet/Direct Commerce costs decreased $7.1 million. Reduced costs in the segment reflect lower cost of goods sold of $3.0 million due to improved margins and the successful disposition of previously written down obsolete and slow moving inventory, lower fulfillment costs of $2.1 million, and the continued benefit of the first quarter restructuring which reduced headcount and lowered technology costs. This was partially offset by higher catalog production costs expensed in the period of $1.1 million. Publishing segment costs decreased $6.9 million primarily reflecting lower paper, printing and distribution costs of Martha Stewart Living magazine, due mainly to lower number of pages printed per issue, partially offset by the additional costs associated with the addition of six issues of Everyday Food, as well as lower costs of $0.8 million associated with our book business. -17- Merchandising costs decreased $1.2 million or 16.5% due to good cost control. Television costs increased $1.2 million, or 9.2%, principally due to higher production costs recognized in the period due to higher staffing costs and the prior year benefit of extending a cable television programming agreement which resulted in the recognition of less production costs in the period. Selling and promotion. Selling and promotion expenses increased $6.2 million, or 18.7%, to $39.6 million for the nine months ended September 30, 2003, from $33.4 million for the nine months ended September 30, 2002. Publishing segment costs increased $3.5 million, or 11.5%, resulting primarily from circulation acquisition costs relating to Everyday Food, partially offset by lower spending related to Martha Stewart Living magazine. Merchandising segment costs increased $1.2 million due to marketing costs associated with the promotion of our Martha Stewart Signature brand. Television segment costs increased $0.6 million, resulting primarily from higher marketing and promotion expenses related to the syndicated program. Corporate costs increased $0.7 million as a result of media spending relating to a corporate promotion program. General and administrative. General and administrative expenses increased $3.5 million, or 9.5%, to $40.2 million for the nine months ended September 30, 2003, from $36.7 million for the nine months ended September 30, 2002. Corporate costs increased $2.7 million, or 10.5%, principally resulting from higher insurance costs of $2.3 million, and higher professional fees. Publishing segment costs increased $0.5 million primarily due to losses related to our Japanese publishing venture. Depreciation and amortization. Depreciation and amortization decreased $2.9 million, or 32.3%, to $6.1 million for the nine months ended September 30, 2003, from $9.0 million for the nine months ended September 30, 2002. The decrease is primarily due to lower depreciation associated with the Company's website, which was written down by $6.1 million in the fourth quarter of 2002 in connection with a restructuring of the Internet/Direct Commerce segment. Interest income, net. Interest income, net, was $1.1 million for the nine months ended September 30, 2003, compared with $1.6 million for the nine months ended September 30, 2002. Higher average cash balances throughout the nine months were more than offset by lower interest yields on cash and short-term investments. Income tax benefit (provision). Income tax benefit for the nine months ended September 30, 2003 was $4.4 million, representing a 39.1% effective income tax rate, compared to an income tax provision of $10.2 million representing an effective income tax rate of 41.0% for the nine months ended September 30, 2002. The effective income tax rate in the current quarter of 2003 reflects a federal tax rate of 35%, without giving benefit to state income tax carry-backs, but allowing for the benefit of certain book-tax differences. State income tax benefits available to the Company resulting from the carry-back of losses to prior years is limited. Accordingly, the Company has not recognized any state tax benefit for the nine month period ended September 30, 2003. Furthermore, no tax benefit has been assumed for state and local loss carry-forwards to future periods. Loss from discontinued operations. Loss from discontinued operations was $0.6 million for the nine months ended September 30, 2003, compared to $2.3 million from the same operations for the nine months ended September 30, 2002. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are primarily facility related. Cumulative Effect Of Accounting Change. As part of the implementation of SFAS No. 142, the Company completed the initial impairment tests in the second quarter of 2002, with a January 1 2002 effective date, which resulted in a charge of approximately $5.0 million ($3.1 million after taxes) to reduce the carrying value of its goodwill related to the Internet/Direct Commerce segment attributable to its 2001 acquisition of The Wedding List. The remaining intangible assets represent goodwill of the Publishing segment and its fair value exceeds the carrying value. Net Income (Loss). Net (loss) was $7.4 million for the nine months ended September 30, 2003, compared to a net income of $9.2 million for the nine months ended September 30, 2002, as a result of the above mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $141.7 million and $131.7 million and short-term investments were $33.7 million and $47.3 million at September 30, 2003 and December 31, 2002, respectively. -18- Cash flows used in operating activities were $2.7 million during the nine months ended September 30, 2003, compared to cash provided by operating activities of $28.9 million during the nine months ended September 30, 2002. Cash used in operating activities during the nine months ended September 30, 2003 were primarily due to a net loss for the period of $7.4 million and changes in operating assets and liabilities of $1.8 million, partially offset by depreciation and amortization of $6.1 million. The changes in operating assets and liabilities include a decrease in accounts receivable due principally to lower advertising revenue, offset by a decrease in accounts payable and lower deferred subscription income. During the nine months ended September 30, 2002, cash flows from operating activities of $28.9 million resulted primarily from net income in the period increased by non-cash charges for depreciation and amortization, the write-off of goodwill resulting from the adoption of FAS No. 142 and accrued losses related to a discontinued operation. Cash flows provided by (used in) investing activities were $12.5 million and $(14.6) million during the nine months ended September 30, 2003 and 2002, respectively. Cash flows provided by investing activities in 2003 resulted from the sale of short-term investments of $13.6 million, partially offset by capital expenditures of $1.0 million. Cash flows used in investing activities in 2002 resulted from the sale of short-term securities of $31.2 million, offset by the purchase of short-term investments of $42.4 million and capital expenditures of $3.5 million. Cash flows provided by financing activities for the nine month periods ended September 30, 2003 and 2002 were $0.2 million and $4.0 million, respectively, representing proceeds received from the exercise of employee stock options. 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 September 30, 2003, we had no outstanding borrowings under this facility. We believe that our available cash balances together with 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 have no intention to pay any dividends in the foreseeable future. SEASONALITY AND QUARTERLY FLUCTUATIONS Several of our businesses can experience fluctuations in quarterly performance. For example, in our Publishing segment, the publication schedule of special interest publications can vary from quarter to quarter. Internet/Direct Commerce revenues have tended to be higher in the fourth quarter due to increased catalog circulation and consumer spending during that period, although revenue in the fourth quarter of 2003 will likely be lower than revenue in the fourth quarter of 2002, due to a planned catalog circulation decline. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines. In addition, we expect to record the difference between royalties paid by Kmart and the minimum contractual amounts due under the contract in the fourth quarter of 2003, when such amount can be determined. CRITICAL ACCOUNTING POLICIES AND ESTIMATES General Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that, of our significant accounting policies, the following may involve the highest degree of judgment and complexity. -19- Revenue Recognition Revenues are recognized when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Newsstand revenues in our Publishing segment and product sales in our Internet/Direct Commerce segment are recognized based upon assumptions with respect to future returns. The Company bases its estimates on historical experience and current market conditions. Reserves are adjusted regularly based upon actual results. We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Receivables for royalties in our merchandising business are accrued on a monthly basis and payment is made by our strategic partners and are generally paid on a quarterly basis. For the nine month period ended September 30, 2003, the Company has recognized royalty revenues earned under our agreement with Kmart based upon actual royalties earned, not contractual minimum amounts. Contractual minimum amounts under the agreement with Kmart are computed on January 31st annually and are payable shortly thereafter. We expect to recognize the difference between the minimum royalty amount and royalties paid on actual sales in the fourth quarter of 2003, when the amount can be determined. Inventory Inventory, consisting of paper and product merchandise, is stated at the lower of cost or market. The Company has recorded a reserve for excess and obsolete product inventory, reducing inventory from cost to estimated market value, based upon historical experience and current market conditions. The reserve is evaluated regularly based upon actual results and adjusted accordingly. Television Production Costs Television production costs are capitalized and amortized based upon estimates of future revenues to be received for the applicable television product. The Company bases its estimates on existing contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues are adjusted regularly based upon actual results and changes in market and other conditions. Long-Lived Assets We review the carrying values of our long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge. TRENDS, RISKS AND UNCERTAINTIES On June 4, 2003, a federal grand jury in the Southern District of New York indicted Martha Stewart, then the Company's Chairman and Chief Executive Officer, on charges of obstruction of an agency proceeding, making false statements to federal investigators, conspiracy, and securities fraud. That same day, the Securities and Exchange Commission ("SEC") filed a civil complaint against Ms. Stewart, in the United States District Court for the Southern District of New York, alleging violations of federal securities law. The charges in the indictment and the SEC civil action relate to a sale by Ms. Stewart of non-Company stock and her alleged conduct during the subsequent investigations. Following the indictment, Ms. Stewart resigned her positions as Chairman and Chief Executive Officer, but retained her roles as a director and the Company's Chief Creative Officer. A trial on the criminal charges against Ms. Stewart currently is scheduled to begin on January 12, 2004 in the Southern District of New York. The SEC action has been stayed until further order of the court. Since June 2002, public disclosure of various governmental investigations into this stock sale, including an investigation by a committee of the United States Congress, has generated a great deal of negative publicity surrounding Ms. Stewart. Because our principal brand labels are closely associated with Ms. Stewart, we have seen since June 2002 substantial negative impacts on our business as a result of the uncertainty surrounding the resolution of these legal proceedings and associated negative publicity. Although it is difficult to quantify with any precision, -20- we believe that, to date, the uncertainty and publicity surrounding these matters have contributed substantially to the following trends and uncertainties our business has experienced since June 2002: a decline in the circulation results and prospects of our magazines; a decrease in advertising revenues and a general uncertainty in our advertising sales prospects; a softness in response rates in our direct commerce business; and a slowdown in new business development and new partner initiatives. In addition, the Company is incurring additional expenses, principally relating to corporate communications and corporate professional fees, associated with the matter. We believe that the uncertainty and negative publicity surrounding the criminal trial will continue to substantially impact our business at least until the resolution of the proceeding. While we believe that a positive resolution to the proceeding would have a significant positive impact on our business, and a negative resolution would have a further negative impact on our business, we are unable to predict with any certainty the extent to which our business would be impacted in either event. Recently we decided to lower the rate base (the number of copies per issue we guarantee to advertisers) for Martha Stewart Living magazine from 2.3 million to 1.8 million copies per issue, effective with the January 2004 issue. This reduction will likely result in lower advertising and circulation revenue for Martha Stewart Living magazine. However, we expect to achieve cost savings as a result of this rate base change. These cost savings will be achieved through reduced magazine production and distribution costs, as well as the reduction of incremental circulation acquisition costs. We expect that this rate base reduction will allow the company to avoid costly circulation acquisition efforts in the future. Our Merchandising segment is highly dependent on Kmart Corporation, which has recently emerged from operating under Chapter 11 of the United States Bankruptcy Code. To the extent that Kmart is unable to continue to operate outside of bankruptcy protection, we might need to secure alternative domestic distribution for our Martha Stewart Everyday product lines. If such distribution of our products were not secured on comparable terms it would have a material adverse effect on our results of operations. In 2003, we expect our royalties based on actual product sales to be less than those guaranteed in our contract with Kmart. Because of the particular mechanics relating to the calculation of the minimum guarantee amounts in the contract, it is impossible to ascertain at this time the exact amount that will be payable to us under that provision. However, the aggregate amount payable to us under the contract for the twelve-month period ending January 31, 2004 will be at least $47.5 million. Accordingly, we expect revenue from the Merchandising segment to approximate between $24-$26 million in the fourth quarter of 2003. For the television season that began in September 2003, the Company has secured distribution for the Martha Stewart Living syndicated program in approximately 90% of U.S. television households, however, at significantly lower aggregate license fees. Additionally, there can be no assurance that we will be able to sustain historical levels of license fees from other programming in the segment in the future. Specifically, certain contracts relating to our cable television shows will expire on December 31, 2003, and renewal or replacements for the contracts have not yet been secured. Accordingly, the combined impact of the lower license fees with the contract expirations will likely result in losses in this segment during the next twelve months. Finally, we believe our syndicated Martha Stewart Living program in particular, is susceptible to an immediate adverse impact from a negative outcome in Ms. Stewart's legal proceedings, including the loss of distribution. On November 7, 2003, the Company completed two stock option exchange offers with its employees. One offer allowed certain employees to exchange stock options for restricted stock units of approximately equivalent value. This offer resulted in the exchange of approximately 4.3 million stock options for approximately 994,000 restricted stock units, with a total value of $10.8 million. The restricted stock units vest 50% on the first anniversary of the grant and the remaining 50% on the second anniversary of the grant. The company will amortize as an expense, beginning in the fourth quarter of 2003, the value of the restricted stock units over the two year vesting period, net of cancellations due to employee terminations prior to vesting. The second offer allowed certain employees to exchange stock options for a cash award. This offer resulted in the exchange of approximately 575,000 stock options for aggregate cash awards of $1.1 million, payable on or around June 30, 2004. The Company will amortize as expense, beginning in the fourth quarter of 2003, the total cash award to be paid over the approximate eight month vesting period through June 30, 2004, net of cancellations due to employee terminations prior to vesting. In light of the continuing uncertainties relating to our businesses during this period and the evolving marketplace -21- reactions to Ms. Stewart's legal situation, we are constantly evaluating all aspects of our business and cost structure to endeavor to achieve the appropriate balance between short-term profitability and long-term shareholder value. We have included in this Quarterly 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 beliefs 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. The Company's actual results may differ materially from those projected in these statements, and factors that could cause such differences include further adverse reaction to the prolonged and continued negative publicity relating to Martha Stewart by consumers, advertisers and business partners; a loss of the services, or diminution in the reputation, of Ms. Stewart; further adverse reaction by the Company's consumers, advertisers and business partners to the uncertainty relating to the nature of the resolution of the criminal and civil proceedings pending against Ms. Stewart concerning a sale of non-Company stock by Ms. Stewart and any adverse resolution of such proceedings; adverse resolution of some or all of the Company's ongoing litigation; downturns in national and/or local economies; shifts in our business strategies; a softening of the domestic advertising market; changes in consumer reading, purchasing and/or television viewing patterns; unanticipated increases in paper, postage or printing costs; operational or financial problems at any of our contractual business partners; the receptivity of consumers to our new product introductions; and changes in government regulations affecting the Company's industries. Certain of these and other factors are discussed in more detail in other parts of this report, especially in this section, "Management's Discussion and Analysis". ITEM 4. CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of September 30, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 3, 2003, the Company was named as a defendant in a Consolidated and Amended Class Action Complaint (the "Consolidated Class Action Complaint"), filed in the United States District Court for the Southern District of New York, by plaintiffs purporting to represent a class of persons who purchased common stock in the Company between January 8, 2002 and October 2, 2002. In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The Consolidated Class Action Complaint also names Martha Stewart and seven of the Company's other officers (Gregory R. Blatt, Dora Braschi Cardinale, Sharon L. Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey (collectively, the "Individual Defendants")) as defendants. The action consolidates seven class actions previously filed in the Southern District of New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002), Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002), MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002), Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002), Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002), Steele v. Martha Stewart Living Omnimedia, Inc. (filed September 13, 2002), and Hackbarth v Martha Stewart Living Omnimedia, Inc. ( filed September 18, 2002). The claims in the Consolidated Class Action Complaint arise out of Ms. Stewart's sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The plaintiffs assert violations of Sections 10(b) (and rules promulgated thereunder), 20(a) and 20A of the Securities Exchange Act of 1934. The plaintiffs allege that MSO, Ms. Stewart and the Individual Defendants made statements about Ms. Stewart's sale that were materially false and misleading. The plaintiffs allege that as a result of these false and misleading statements, the market price of the Company's stock was inflated during the putative class periods and dropped after the alleged falsity of the statements became public. The plaintiffs further allege that the Individual Defendants traded MSO stock while in possession of material non-public information. The Consolidated -22- Class Action Complaint seeks certification as a class action, damages, attorney's fees and costs, and further relief as determined by the court. The Company has also been named as a nominal defendant in four derivative actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation, filed on December 19, 2002 in New York State Supreme Court; Beam v. Stewart, initially filed on August 15, 2002 and amended on September 6, 2002, in Delaware Chancery Court; Richards v. Stewart, filed on November 1, 2002 in Connecticut Superior Court; and Sargent v. Martinez, filed on September 29, 2003 in the U.S. District Court for the Southern District of New York. Company directors Arthur Martinez, Darla Moore, Sharon Patrick, Jeffrey Ubben and former directors John Doerr and Naomi Seligman, are also named as defendants in Beam. Mr. Martinez, Ms. Moore, Ms. Patrick, Mr. Ubben, Mr. Doerr, Ms. Seligman, five of the Company's officers (Mr. Blatt, Ms. Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins Caufield & Byers are also named as defendants in Richards. Mr. Martinez, Ms. Moore, Ms. Patrick, Mr. Ubben, and Ms. Seligman are also named as defendants in Sargent. In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation consolidates three previous derivative complaints filed in New York State Supreme Court and Delaware Chancery Court: Beck v. Stewart, filed on August 13, 2002 in New York State Supreme Court, Kramer v. Stewart, filed on August 20, 2002 in New York State Supreme Court, and Alexis v. Stewart, filed on October 3, 2002 in Delaware Chancery Court. Sargent consolidates two derivative complaints previously filed in the U.S. District Court for the Southern District Court of New York: Acosta v. Stewart, filed on October 10, 2002, and Sargent v. Martinez, filed on May 30, 2003. All four derivative actions allege that Ms. Stewart breached her fiduciary duties to the Company by engaging in insider trading in ImClone stock and making false and misleading statements about such trading. The plaintiffs allege that these actions have diminished Ms. Stewart's reputation and injured the Company through lost revenues, loss of reputation and good will, decreased stock price, and increased costs. The plaintiff in Beam further alleges that (i) Ms. Stewart's actions have jeopardized the Company's intellectual property; (ii) the directors breached their fiduciary duties by failing to monitor Ms. Stewart's affairs to ensure she did not harm the Company; (iii) Ms. Stewart and the other directors breached their fiduciary duties by failing to address the impropriety of the Company's payment of split dollar insurance premiums; and (iv) Ms. Stewart and Mr. Doerr usurped corporate opportunities by selling personally-owned Company stock to an investment firm without first presenting the Company with the opportunity to sell its stock to the firm. The plaintiffs in the Shareholder Derivative Litigation also allege that Ms. Stewart breached the terms of her employment agreement with the Company. The plaintiff in Richards further alleges (i) intentional breach of fiduciary duty by, among other things, acting in reckless disregard of, and failing to prevent, Ms. Stewart's insider trading in ImClone stock, violating federal securities laws by selling Company stock while in possession of material, non-public information, misuse of corporate information, and gross mismanagement of the Company; (ii) negligent breach of fiduciary duty; (iii) abuse of control; (iv) constructive fraud; (v) gross mismanagement; and (vi) waste. The plaintiffs in Sargent further allege that the directors breached their fiduciary duties by (i) failing to take appropriate action to address Ms. Stewart's wrongdoing; (ii) granting Ms. Stewart a bonus for 2002; and (iii) endorsing an amendment to the Company's agreement with Ms. Stewart for the rental of certain properties. The derivative actions seek damages in favor of the Company, attorneys' fees and costs, and further relief as determined by the court. Certain of the complaints also seek declaratory relief. The plaintiffs in the Shareholder Derivative Litigation and Sargent further seek the creation of a committee or other administrative mechanism to address the alleged "corporate governance" issues raised in the complaints and to protect the Company's "cornerstone assets." The plaintiff in Richards further seeks injunctive relief in the form of attachment or other restriction of the proceeds of defendants' trading activities or other assets. On May 19, 2003, the Company's motion to dismiss the Consolidated Class Action Complaint was denied, and discovery in that action is ongoing. By stipulation of the parties, and an order of the Court entered November 10, 2003, all claims asserted in the Consolidated Class Action Complaint pursuant to Section 20A (Insider Trading) of the Securities Exchange Act against defendants Gregory R. Blatt, Dora Braschi Cardinale, Sharon L. Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey, and all remaining claims against defendants Cardinale, Roach, Sobel, Stanich and Towey, have been dismissed without prejudice. On April, 17, 2003, the Company's motion to dismiss the Shareholder Derivative Litigation was granted to the extent that the action has been stayed pending plaintiffs' submission of a demand to initiate litigation on the Company's Board or a determination by the Federal District Court in the Acosta action (now the consolidated Sargent action) that such a demand is excused. On September 30, 2003, the Company's motion to dismiss the Beam complaint was granted in its entirety. The plaintiffs in Beam have filed a notice of appeal to the Delaware Supreme Court and must file their opening brief on appeal by November 20, 2003. The Company's motion to dismiss and/or stay the Sargent action is presently due to be filed on October 27, 2003. The Richards action had been stayed pending resolution of the Beam motion to dismiss, and the Company expects that stay to remain in place. -23- While still in their early stages, we believe the Company has substantial defenses to these actions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report:
Exhibit Number Exhibit Title ------ ------------- 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(b) Reports on Form 8-K On October 30, 2003, the Company filed a Current Report on Form 8-K reporting its earnings for its fiscal third quarter ended September 30, 2003. On November 5, 2003, the Company filed a Current Report on Form 8-K providing a transcript of its third quarter earnings conference call held on October 30, 2003. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARTHA STEWART LIVING OMNIMEDIA, INC. Date: November 14, 2003 By: /s/ James Follo ---------------------------------------- Name: James Follo Title: Chief Financial and Administrative Officer -25- EX-31.1 3 y91721exv31w1.txt CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION I, Sharon Patrick, certify that: 1. I have reviewed this Quarterly Report of Martha Stewart Living Omnimedia, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted pursuant to SEC Release No. 33-8238]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Sharon Patrick ----------------------------------- Sharon Patrick President and Chief Executive Officer EX-31.2 4 y91721exv31w2.txt CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION I, James Follo, certify that: 1. I have reviewed this Quarterly Report of Martha Stewart Living Omnimedia, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted pursuant to SEC Release No. 33-8238]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ James Follo ------------------------------------------ James Follo Chief Financial and Administrative Officer EX-32 5 y91721exv32.txt 906 CERTIFICATION EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Martha Stewart Living Omnimedia, Inc., a Delaware corporation (the "Company"), does hereby certify that: The Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ Sharon Patrick ------------------------------------------ Sharon Patrick President and Chief Executive Officer Dated: November 14, 2003 /s/ James Follo ------------------------------------------ James Follo Chief Financial and Administrative Officer -----END PRIVACY-ENHANCED MESSAGE-----