-----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, Hp6EXmp/IELUV/F2C4uWp4ctVrfoNN0k/VBjwEJ8RlTZ4pGYPm70KBXjWl1BIAbU oS4W+KPIK/fBVcRmixti8Q== 0000950123-04-012790.txt : 20041101 0000950123-04-012790.hdr.sgml : 20041101 20041101171307 ACCESSION NUMBER: 0000950123-04-012790 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20041101 DATE AS OF CHANGE: 20041101 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-15395 FILM NUMBER: 041110798 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/A 1 y68173e10vqza.txt AMENDMENT NO.1 TO FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-Q/A AMENDMENT NO. 1 TO THE QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 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 at May 4, 2004 Class A, $0.01 par value 19,804,779 Class B, $0.01 par value 29,758,745 -------------------------- Total 49,563,524 ==========================
EXPLANATORY NOTE This amendment on Form 10-Q/A amends the Company's Quarterly Report on Form 10-Q for the period ended March 30, 2004, as initially filed with the Securities and Exchange Commission (the "SEC") on May 10, 2004, and is being filed to reflect the restatement of the Company's condensed consolidated financial statements for the three month period ended March 31, 2004 and 2003, as discussed in Note 7 to the Company's condensed consolidated financial statements. The Company previously recognized as expense its estimate of annual subscription-acquisition costs ratably throughout the year. After reviewing this matter with its independent certified public accounting firm and its audit committee, the Company determined on October 26, 2004 to change the method of accounting for interim period expense recognition of its subscription acquisition costs. The Company will now recognize subscription-acquisition costs in the period in which the acquisition efforts take place and has restated the financial statements included in this filing accordingly. The Company's independent certified public accounting firm concurs with the changes. The change in accounting for subscription acquisition costs has no impact on full-year results of operations or earnings (loss) per share as all subscription acquisition costs will continue to be expensed in the year incurred. Additional disclosures are provided in Note 2 to the Company's condensed consolidated financial statements detailing the changes. This amendment does not reflect events after the filing of the original report and does not modify or update disclosures as originally filed, except as required to reflect the effects of the restatement. -2- MARTHA STEWART LIVING OMNIMEDIA, INC. Index to Form 10-Q
PAGE ---- Part I. Financial Information Item 1. Financial Statements (restated) 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (restated) 13 Item 4. Controls and Procedures 19 Part II. Other Information Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22
-3- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MARTHA STEWART LIVING OMNIMEDIA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
March 31, December 31, 2004 2003 -------------- ------------ (unaudited and as restated, see note 2) ASSETS CURRENT ASSETS Cash and cash equivalents $ 166,701 $ 165,566 Short-term investments 3,100 3,100 Accounts receivable, net 20,002 39,758 Inventories, net 8,769 7,485 Deferred television production costs 2,976 3,465 Income taxes receivable 5,658 5,658 Deferred income taxes, net 1,881 5,024 Other current assets 3,197 4,422 -------------- ------------ TOTAL CURRENT ASSETS 212,284 234,478 -------------- ------------ PROPERTY, PLANT AND EQUIPMENT, net 21,297 22,673 INTANGIBLE ASSETS, net 44,257 44,257 DEFERRED INCOME TAXES 3,224 3,224 OTHER NONCURRENT ASSETS 4,455 4,470 -------------- ------------ TOTAL ASSETS $ 285,517 $ 309,102 ============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 23,034 $ 26,628 Accrued payroll and related costs 6,760 10,360 Income taxes payable 469 167 Current portion of deferred subscription income 24,728 23,833 -------------- ------------ TOTAL CURRENT LIABILITIES 54,991 60,988 -------------- ------------ DEFERRED SUBSCRIPTION INCOME 7,385 7,133 OTHER NONCURRENT LIABILITIES 4,308 4,316 -------------- ------------ TOTAL LIABILITIES 66,684 72,437 -------------- ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 19,775 and 19,628 shares outstanding in 2004 and 2003, respectively 198 196 Class B common stock, $.01 par value, 150,000 shares authorized; 29,909 and 30,059 outstanding in 2004 and 2003, respectively 299 301 Capital in excess of par value 185,261 183,744 Unamortized restricted stock (175) (307) Retained earnings 34,025 53,506 -------------- ------------ 219,608 237,440 Less: Class A treasury stock - 59 shares at cost (775) (775) -------------- ------------ TOTAL SHAREHOLDERS' EQUITY 218,833 236,665 -------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 285,517 $ 309,102 ============== ============
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- MARTHA STEWART LIVING OMNIMEDIA, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited, in thousands, except per share data) As restated, see note 2
Three Months Ended March 31, -------------------- 2004 2003 -------- -------- REVENUES Publishing $ 23,910 $ 34,060 Television 4,177 6,615 Merchandising 10,789 10,328 Internet/Direct Commerce 5,613 7,019 -------- -------- TOTAL REVENUES 44,489 58,022 -------- -------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 28,966 35,625 Selling and promotion 13,474 10,757 General and administrative 16,914 14,974 Depreciation and amortization 1,674 2,141 -------- -------- TOTAL OPERATING COSTS AND EXPENSES 61,028 63,497 -------- -------- OPERATING LOSS (16,539) (5,475) Interest income, net 362 402 -------- -------- LOSS BEFORE INCOME TAXES (16,177) (5,073) Income tax (provision) benefit (3,143) 2,127 -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS (19,320) (2,946) Loss from discontinued operations, net of tax benefit in 2003 (161) (221) -------- -------- NET LOSS $(19,481) $ (3,167) ======== ======== LOSS PER SHARE - BASIC AND DILUTED Loss from continuing operations $ (0.39) $ (0.06) Loss from discontinued operations 0.00 0.00 -------- -------- Net loss $ (0.39) $ (0.06) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 49,464 49,450 -------- -------- Diluted 49,464 49,450 -------- --------
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 Three Months Ended March 31, 2004 (unaudited, in thousands) As restated, see note 2
Class A Class B Class A common stock common stock Treasury Stock ---------------- --------------- -------------- Capital in excess of Unamortized par Restricted Retained Shares Amount Shares Amount value Stock Earnings Shares Amount Total ------ ------ ------ ------ ---------- ----------- -------- ------ ------ --------- Balance at January 1, 2004 19,628 $ 196 30,059 $ 301 $ 183,744 $ (307) $ 53,506 (59) $ (775) $ 236,665 Net loss - - - - - - (19,481) - - (19,481) Issuance of shares for stock option exercises 147 2 - - 192 - - - - 194 Shares returned on net treasury basis - - (150) (2) 2 - - - - - Amortization of restricted stock units - - - - 1,323 - - - - 1,323 Amortization of restricted stock - - - - - 132 - - - 132 ------ ------ ------ ------ ---------- ----------- -------- ------ ------ --------- Balance at March 31, 2004 19,775 $ 198 29,909 $ 299 $ 185,261 $ (175) $ 34,025 (59) $ (775) $ 218,833 ====== ====== ====== ====== ========== ========= ======== === ====== =========
The accompanying notes are an integral part of these consolidated financial statements. -6- MARTHA STEWART LIVING OMNIMEDIA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) As restated, see note 2
For The Three Months Ended March 31, -------------------------- 2004 2003 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (19,481) $ (3,167) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,674 2,141 Amortization of restricted stock units and restricted stock 1,455 123 Deferred income tax expense 3,143 - Changes in operating assets and liabilities 14,448 (11,198) ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,239 (12,101) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (298) (306) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (298) (306) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received from stock option exercises 194 - ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 194 - ---------- ---------- NET INCREASE (DECREASE) IN CASH 1,135 (12,407) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,566 131,664 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 166,701 $ 119,257 ========== ==========
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, 2003. 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. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management's judgment about the future realization of deferred tax assets. The Company has used carryback income to realize net deferred tax assets. Since the amounts and extent of the Company's future earnings are not determinable with a sufficient degree of probability to recognize the deferred tax assets in accordance with the requirements of SFAS 109, the Company has established a valuation allowance of $9,025 in the first quarter of 2004. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax asset could be realized. Until such time, except for state, local, and foreign provisions, the Company will have no reported tax provision, net of valuation adjustments. d. Reclassifications Certain prior year financial information has been reclassified to conform with fiscal 2004 financial statement presentation. -8- e. 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 periods ended March 31, 2003. No options were granted during the three months ended March 31, 2004.
2003 ------- risk-free interest rates 3.39% dividend yields zero expected volatility 134% expected option life 6 years average fair market value per option granted $ 8.96
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 effects on net loss for the three months ended March 31, 2004 and 2003 were as follows:
2004 2003 --------- ---------- Net loss, as restated $ (19,481) $ (3,167) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 19 2,568 --------- ---------- Proforma net loss $ (19,500) $ (5,735) Loss per share: Basic and diluted - as restated $ (0.39) $ (0.06) Basic and diluted - pro forma $ (0.39) $ (0.12)
-9- 2. Restatement Relating to Interim Subscription Acquisition Costs. Subsequent to the issuance of the March 31, 2004 condensed consolidated financial statements, the Company determined the need to adjust the recognition of expense related to subscription acquisition costs. The Company previously recognized as expense its estimate of annual subscription-acquisition costs ratably throughout the year. The Company changed its expense recognition practice and will now recognize subscription-acquisition costs in the period in which the acquisition efforts take place and has restated the financial statements included in this filing accordingly. Following are the changes presented in tabular format.
Three Months Three Months Ended March 31, 2004 Ended March 31, 2003 As Adjust- As Adjust- reported ment Restated reported ment Restated -------- ------- -------- -------- ------- -------- INCOME STATEMENT Selling and promotion $ 14,250 $ (776) $ 13,474 $ 12,821 $(2,064) $ 10,757 Operating income (loss) (17,315) 776 (16,539) (7,539) 2,064 (5,475) Income tax benefit (provision) (3,143) - (3,143) 2,849 (722) 2,127 Net income (loss) (20,257) 776 (19,481) (4,509) 1,342 (3,167) Income (loss) per share $ (0.41) $ 0.02 $ (0.39) $ (0.09) $ 0.03 $ (0.06)
As of March 31, 2004 As reported Adjustment Restated ----------- ---------- -------- BALANCE SHEET Accounts payable and accrued liabilities $ 23,810 $ (776) $ 23,034 Retained earnings 33,249 776 34,025 CASH FLOWS Net income (loss) (20,057) 776 (19,481) Changes in operating assets and liabilities 15,224 (776) 14,448 SHAREHOLDERS' EQUITY Net loss (20,257) 776 (19,481) Retained earnings $ 33,249 $ 776 $ 34,025
3. Inventories The components of inventories are as follows:
March 31, December 31, 2004 2003 ---------- ------------ Paper $ 5,930 $ 4,610 Product merchandise 4,515 4,801 ---------- ------------ 10,445 9,411 Less: reserve for obsolete and excess inventory 1,676 1,926 ---------- ------------ $ 8,769 $ 7,485 ========== ============
4. Loss per share Loss per share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during each period. Diluted loss per share include the determinants of basic loss per share and, in addition, give effect to potentially dilutive common shares. For the three months ended March 31, 2004 and 2003, 403 and 4,509 stock options were excluded from the calculation of diluted loss per share, as their inclusion would be antidilutive. 5. 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 and newspaper 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, and certain other international markets. The Merchandising segment consists of the Company's operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Internet/Direct Commerce segment comprises the Company's operations relating to its catalog, Martha Stewart: The Catalog For Living, its direct-to-consumer floral business and the website marthastewart.com. The Company believes operating income before depreciation and amortization ("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. -10- Revenues for each segment are presented in the condensed consolidated statements of income. Income (loss) from operations for each segment were as follows:
Three Months Ended March 31, As restated, see note 2 ------------------------------- 2004 2003 ---------- ---------- OPERATING INCOME (LOSS) Publishing $ (3,848) $ 7,036 Television (1,947) 227 Merchandising 6,489 7,035 Internet/Direct Commerce (2,679) (8,252) ---------- ---------- Operating Income (Loss) before Corporate Overhead (1,985) 6,046 Corporate Overhead (14,553) (11,521) ---------- ---------- TOTAL OPERATING LOSS (16,538) (5,475) ---------- ---------- DEPRECIATION AND AMORTIZATION Publishing 62 41 Television 57 394 Merchandising 190 168 Internet/Direct Commerce 243 247 Corporate Overhead 1,122 1,291 ---------- ---------- TOTAL DEPRECIATION AND AMORTIZATION 1,674 2,141 ---------- ---------- OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION Publishing (3,786) 7,077 Television (1,890) 621 Merchandising 6,679 7,203 Internet/Direct Commerce (2,436) (8,005) ---------- ---------- Operating Income (Loss) before Depreciation and Amortization before Corporate Overhead (1,433) 6,896 Corporate Overhead, excluding Depreciation and Amortization (13,431) (10,230) ---------- ---------- TOTAL OPERATING LOSS BEFORE DEPRECIATION AND AMORTIZATION $ (14,864) $ (3,334) ========== ==========
-11- 6. 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. Operating results for The Wedding List for the three months ended March 31, 2004 and 2003 were as follows:
March 31, March 31, 2004 2003 --------- --------- Revenues $ - $ 572 Loss from operations, including accrued restructuring and shutdown costs (161) (340) Income tax benefit - 119 --------- --------- Net loss from discontinued operations $ (161) $ (221) ========= =========
7. Supplemental cash flow information:
Three Months Ended March 31, ------------------ 2004 2003 ---- ------ Cash paid for interest $ - $ 13 Cash paid for income taxes 11 1,529
-12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Restated) 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 MARCH 31, 2004 TO THREE MONTHS ENDED MARCH 31, 2003
Three Months Ended March 31, ------------------------ 2004 2003 -------- -------- (in thousands, except per share amounts) REVENUES Publishing $ 23,910 $ 34,060 Television 4,177 6,615 Merchandising 10,789 10,328 Internet/Direct Commerce 5,613 7,019 -------- -------- TOTAL REVENUES 44,489 58,022 -------- -------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 28,966 35,625 Selling and promotion 13,474 10,757 General and administrative 16,914 14,974 Depreciation and amortization 1,674 2,141 -------- -------- TOTAL OPERATING COSTS AND EXPENSES 61,028 63,497 -------- -------- OPERATING LOSS (16,539) (5,475) Interest income , net 362 402 -------- -------- LOSS BEFORE INCOME TAXES (16,177) (5,073) Income tax (provision) benefit (3,143) 2,127 -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS (19,320) (2,946) -------- -------- Loss from discontinued operations (161) (221) -------- -------- NET LOSS $(19,481) $ (3,167) ======== ========
EXECUTIVE SUMMARY TRENDS, RISKS AND UNCERTAINTIES Since June 2002, public disclosure of various governmental investigations into Martha Stewart's sale of non-Company stock and of the criminal and civil charges against Ms. Stewart arising out of the investigations 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 difficult to quantify with any precision, we believe that the uncertainty and publicity surrounding these matters contributed substantially to some of the adverse trends our business has experienced since June 2002. -13- On June 4, 2003, a federal grand jury in the United States District Court for the Southern District of New York indicted Ms. 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. On July 10, 2003, the SEC action was stayed until further order of the court. 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. On March 5, 2004, Martha Stewart was found guilty of conspiracy, obstruction of an agency proceeding, and making false statements to federal investigators concerning her personal sale of non-Company stock. Ms. Stewart is scheduled to be sentenced on June 17, 2004. On March 15, 2004, Ms. Stewart resigned her positions as a director and Chief Creative Officer of the Company, and assumed the position of Founding Editorial Director, a non-officer position. The Company has been carefully evaluating the responses of customers, advertisers, and business partners to the outcome of Ms. Stewart's trial, in order to assess the potential impact upon the Company's portfolio of assets and make appropriate decisions with respect to the Company's business operations and strategy. In light of the results of this assessment, the Company may consider and implement a broad range of business initiatives and strategic alternatives. These may include, without limitation, the rebranding of certain assets, changes in core content areas, new business initiatives, development of new expert personalities, changes in relationships with strategic partners, disposition of certain products, assets and businesses, and cost reduction initiatives as well as other business efficiencies. Although we are unable to predict the full effect of the outcome of Ms. Stewart's trial on our business, we have experienced further declines in advertising revenues since the trial outcome, principally in our publishing segment. In addition, we may be deprived of Ms. Stewart's services for a period of time. We may experience further material adverse impacts as a result of the trial outcome, including, without limitation, additional revenue declines, additional litigation, additional expenses relating to corporate communications and corporate professional fees and loss of key personnel. For the first quarter of 2004, we suffered a net loss of $20.3 million compared to a net loss of $4.5 million in the same quarter of the prior year. We may sustain substantial operating losses in future periods and our cash position may be materially adversely affected. In 2003, prior to the resolution of Ms. Stewart's criminal proceeding, 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. Although this reduction has resulted and will continue to result in lower advertising rates and lower circulation revenue on a year-over-year basis for Martha Stewart Living magazine, we will achieve cost savings through reduced magazine production and distribution costs and reduction of incremental circulation acquisition costs as a result of the rate base change. Since March 5, 2004, the availability of the Martha Stewart Living television program has declined to approximately 50% of U.S. television households from previous levels of approximately 90% primarily due to the loss of coverage from the CBS owned and operated stations. This reduction in household coverage will result in lower license fees and advertising revenues. In light of this development, we are evaluating future strategic actions with respect to our Television business for the television season beginning September 2004 and beyond. However, we currently intend to provide content for the remainder of the current season. Additionally, certain contracts relating to our cable television shows expired on December 31, 2003 and were not renewed. We believe that the combined impact of lower license fees, reduction in household coverage of our flagship syndicated television program, and contract expirations will result in losses in the Television segment in 2004. On February 11, 2004, Kmart Corporation filed an action with the United States Bankruptcy Court, Northern District of Illinois, Eastern Division, against MSO IP Holdings, Inc., a wholly owned subsidiary of MSO, seeking declaratory and other relief under the June 2001 contract between Kmart and MSO IP. In its complaint, Kmart sought to interpret the agreement in a manner that would require it to make minimum royalty payments for the remaining life of the contract based solely upon aggregate sales of licensed products. In addition, Kmart sought to reduce the amount it is obligated under the contract to spend with MSO on advertising in MSO media properties. On April 22, 2004, we reached an agreement with Kmart to amend the terms of our contract and executed certain -14- releases. We believe that this agreement better aligns the two companies' mutual business interests. In connection with the amendment and releases, on April 23, 2004, Kmart voluntarily dismissed its complaint with prejudice, terminating the litigation. The amendment, among other things, extends the Kmart contract for an additional two years and expands the scope of the contract to cover several new product categories. At the same time, the amendment eliminates, with respect to 2003 and subsequent years, provisions of the contract providing for payment of guaranteed minimum royalties by individual product category and reduces the amount Kmart is obligated under the contract to spend with MSO on advertising in MSO media properties. The amendment also reduces the aggregate minimum royalty payments. The aggregate minimum royalty payment for the period February 1, 2004 to January 31, 2005 was reduced to $49 million from $53.4 million previously. We continue to expect that the minimum guaranteed royalty payments will exceed actual royalties earned from retail sales through January 31, 2008. For the contract years ending January 31, 2009 and 2010, we currently anticipate that royalties earned will be based upon actual royalties from retail sales, rather than the contractual minimums for such years. To date, since March 5, 2004, we have not experienced any material adverse impact on sales of our products or circulation of our magazines. Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31, 2003 Revenues. Total revenues decreased $13.5 million, or 23.3%, to $44.5 million for the quarter ended March 31, 2004, from $58.0 million for the quarter ended March 31, 2003. Publishing revenues decreased $10.2 million, or 29.8%, to $23.9 million for the quarter ended March 31, 2004, from $34.1 million for the quarter ended March 31, 2003. This decrease was primarily due to a decrease in advertising revenues of $11.5 million. The decrease in advertising revenue resulted primarily from fewer advertising pages in Martha Stewart Living, as well as a reduction in the advertising page rate, due in part to the rate base (the number of copies per issue we guarantee to advertisers) reduction which became effective commensurate with the January 2004 issue. The total quarterly decrease in advertising revenue in Martha Stewart Living was $8.5 million. The reduction in advertising revenue was also attributable to lower advertising revenue in Everyday Food of $2.6 million, as the prior year's quarter included advertising revenues from a sponsorship arrangement. Circulation revenue increased $1.6 million in the quarter. The increase in circulation revenues was primarily due to the higher circulation and increased frequency of Everyday Food, as well as an additional Special Interest Publication (SIP) published in the quarter. The increase was partially offset by lower subscription revenues from Martha Stewart Living magazine, due primarily to lower subscription copies sold as part of our rate base reduction. Television revenues decreased $2.4 million, or 36.9%, to $4.2 million for the quarter ended March 31, 2004, from $6.6 million for the quarter ended March 31, 2003. The decrease is primarily attributable to lower revenue from our syndicated daily program of $1.4 million due in part to lower license fees. The segment was also impacted by the expiration of certain cable licensing contracts effective December 31, 2003. Merchandising revenues increased $0.5 million, or 4.5%, to $10.8 million for the quarter ended March 31, 2004, from $10.3 million for the quarter ended March 31, 2003, primarily due to recognizing as revenue the pro-rata portion of the contractual minimum royalty amount, totaling $2.4 million, due from Kmart for the 12 month period ended January 31, 2004, relating to January 2004. We expect the minimum guarantees will exceed actual royalties earned from retail sales for the foreseeable future primarily due to store closings. Royalties earned on actual product sales (excluding minimum guarantees) declined on a quarter-over-quarter basis principally due to the impact of Kmart store closings 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 5% on February 1, 2004. Revenue from Kmart represented approximately 83% of total segment revenue for the quarter ended March 31, 2004. The quarter also benefited from the launch of our Martha Stewart Everyday product at Sears Canada in September of 2003. Royalty revenue from the sales of Martha Stewart Signature products increased $0.2 million for the period ended March 31, 2004. Internet/Direct Commerce revenues decreased $1.4 million, or 20.0%, to $5.6 million for the quarter ended March 31, 2004, from $7.0 million for the quarter ended March 31, 2003 due to lower commerce sales related to our catalog offerings and lower advertising revenue, partially offset by higher revenue from our direct-to-consumer floral business. The lower commerce sales are primarily due to planned lower catalog circulation. -15- Magazine Publication Schedule Three month period ended March 31,:
2004 2003 ------------ ------------ Martha Stewart Living Three Issues Three Issues Everyday Food Three Issues Two Issues Special Interest Publications Three Issues Two Issues
Production, Distribution and Editorial. Production, distribution and editorial expenses decreased $6.7 million, or 18.7%, to $29.0 million for the quarter ended March 31 2004, from $35.6 million for the quarter ended March 31, 2003. Internet/Direct Commerce costs decreased $5.5 million. Reduced costs in the segment reflect lower catalog production and distribution costs of $2.4 million due to reduced catalog circulation. Lower costs were also due in part to lower product sales, an improved product gross margin and improved distribution efficiencies which collectively contributed to $2.1 million of lower costs in the quarter. The segment continued to benefit from the prior year restructuring which reduced headcount and lowered technology costs. Publishing segment costs decreased $1.8 million primarily reflecting lower paper, printing and distribution costs of Martha Stewart Living magazine, due mainly to a lower number of pages printed per issue and lower circulation, partially offset by the additional costs associated with the publication of an additional issue of Everyday Food as well as an additional SIP in the quarter. Selling and Promotion. Selling and promotion expenses increased $2.7 million, or 25.3%, to $13.5 million for the quarter ended March 31, 2004, from $9.5 million for the quarter ended March 31, 2003. Publishing segment costs increased $2.8 million resulting primarily from circulation acquisition costs relating to Everyday Food and one of our SIP's, partially offset by lower spending related to Martha Stewart Living magazine. General and Administrative. General and administrative expenses increased $1.9 million, or 13.0%, to $16.9 million for the quarter ended March 31, 2004, from $15.0 million for the quarter ended March 31, 2003. Corporate costs increased $3.2 million principally resulting from higher employee-related costs, including the November 2003 stock option exchange offers of $1.7 million and higher legal, corporate communications and consulting fees. Internet/Direct Commerce costs decreased $1.4 million primarily due to the absence of costs incurred in the prior year related to consulting and severance costs. Depreciation and Amortization. Depreciation and amortization decreased $0.5 million, or 21.8%, to $1.7 million for the quarter ended March 31, 2004, from $2.1 million for the quarter ended March 31, 2003. The decrease is primarily due to lower depreciation associated with certain assets of our Connecticut television studio. The company reduced the net carrying value of those assets in the fourth quarter of 2003. Income tax benefit (expense). Income tax expense for the three months ended March 31, 2004 was $3.1 million, compared to an income tax benefit of $2.1 million, representing an effective income tax rate of 42% for the three months ended March 31, 2003. The current period provision reflects a valuation allowance of $9.0 million taken against certain deferred tax assets since the amounts and extent of the Company's future earnings are not determinable with a sufficient degree of probability. Loss from discontinued operations. Loss from discontinued operations was $0.2 million for the three months ended March 31, 2004 and 2003. 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. Net Loss. Net loss was $(19.5) million for the three months ended March 31, 2004, compared to a net loss of ($3.2) million for the three months ended March 31, 2003, as a result of the above mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $166.7 million and $165.6 million and short-term investments were $3.1 million and $3.1 million at March 31, 2004 and December 31, 2003, respectively. Cash flows provided by operating activities were $1.2 million during the three months ended March 31, 2004, compared to cash used in operating activities of $12.1 million during the three months ended March 31, 2003. Cash -16- provided by operating activities during the three months ended March 31, 2004 were primarily due to a changes in operating assets and liabilities of $14.4 million, an increase in the deferred income tax expense, and by depreciation and amortization of $1.7 million as well as the amortization of restricted stock units and restricted stock of $1.5 million, partially offset by a net loss for the period of $19.5 million. The changes in operating assets and liabilities include a decrease in accounts receivable due principally to the collection of a royalty receivable due from Kmart related to our minimum royalty payment, partially offset by a decrease in certain accounts payable. Cash used in operating activities during the three months ended March 31, 2003 was primarily due to a net loss for the period of $3.2 million and changes in operating assets and liabilities reducing cash flow of $11.2 million, partially offset by depreciation and amortization of $2.1 million. Cash used by changes in operating assets and liabilities during the quarter is primarily a result of decreases in accounts payable and accrued liabilities and accrued payroll and related costs, partially offset by decreased accounts receivable. Cash flows used in investing activities were $0.3 million in each of the three month periods ended March 31, 2004 and 2003. Cash flows used in investing activities in both periods resulted from capital expenditures. Cash flows provided by financing activities for the three month period ended March 31, 2004 were $0.2 million, 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 March 31, 2004, 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. 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 recognize the pro-rata portion of the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of 2004, when the 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, deferred tax assets, 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. 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 -17- 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 generally made by our strategic partners on a quarterly basis. For the three month period ended March 31, 2004, the Company has recognized the pro-rata portion of the contractual minimum royalty amount due from Kmart for the period ended January 31, 2004, relating to January 2004. Revenues recorded under our agreement with Kmart for the months of February and March were based on 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 pro-rata portion of the difference between the minimum royalty amount and royalties paid on actual sales in the fourth quarter of 2004, 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. Intangible assets Commencing January 1, 2002, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized to earnings and be tested for impairment at least annually. The impairment tests are based upon a fair-value approach as described in SFAS No. 142. Tests for impairment or recoverability require significant management judgment, and future events affecting cash flows and market conditions could result in impairment losses. Forward-looking Statements 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. 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; further adverse reaction by the Company's consumers, advertisers and business partners to the outcome of Ms. Stewart's trial arising from a sale of non-Company stock by Ms. Stewart; a loss of the services of -18- Ms. Stewart; a loss of the services of other key personnel; an adverse resolution to the SEC enforcement proceeding currently underway against Ms. Stewart arising from her personal sale of non-Company stock; 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 of Financial Condition and Results of Operations." 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 March 31, 2004. 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. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Kmart Litigation. On February 11, 2004 Kmart Corporation filed an action with the United States Bankruptcy Court, Northern District of Illinois, Eastern Division, against MSO IP Holdings, Inc., a wholly owned subsidiary of MSO, seeking declaratory and other relief under the June 2001 contract between Kmart and MSO IP. Kmart sought to interpret the agreement in a manner that would require it to make minimum royalty payments for the remaining life of the contract based solely upon aggregate sales of licensed products. In addition, Kmart sought to reduce by approximately $1 to $2 million annually the amount it is obligated under the contract to spend with MSO on advertising in MSO media properties. On April 22, 2004, MSO IP and Kmart executed an amendment to the June 2001 contract between MSO IP and Kmart, as well as certain mutual releases. In connection with the amendment and releases, on April 23, 2004 Kmart voluntarily dismissed its complaint with prejudice, terminating the litigation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Trends, Risks and Uncertainties." Other Company Litigation. 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 present or former officers (Gregory R. Blatt, Sharon L. Patrick, and five other Company officers (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 -19- 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 Class Action Complaint seeks certification as a class action, damages, attorneys' fees and costs, and further relief as determined by the court. 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 the Individual Defendants, and all remaining claims against the Individual Defendants, other than Mr. Blatt and Ms. Patrick, have been dismissed without prejudice. 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 (the "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, Sharon Patrick, Jeffrey Ubben and former directors John Doerr, Darla Moore and Naomi Seligman, are also named as defendants in Beam. Mr. Martinez, Ms. Patrick, Mr. Ubben, Mr. Doerr, Ms. Moore, Ms. Seligman, five of the Company's present or former 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. Patrick, Mr. Ubben, Ms. Moore 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. -20- 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 appealed the dismissal of the complaint to the Delaware Supreme Court. On March 31, 2004, the Delaware Supreme Court, sitting en banc, unanimously affirmed the dismissal of the Beam complaint. The Sargent action had previously been stayed by order of the court pending resolution of the Beam appeal by the Delaware Supreme Court. On April 22, 2004, the court lifted that stay and ordered the plaintiffs to respond to MSO's and the MSO directors' previously filed motions to dismiss. Oral argument on those motions to dismiss is scheduled for July 23, 2004. The Richards action had been stayed by agreement of the parties pending resolution of the Beam appeal by the Delaware Supreme Court. By agreement of the parties, MSO's and the director defendants' motions to dismiss the Richards action are due to be filed on June 14, 2004. While still in their early stages, we believe the Company has substantial defenses to the Consolidated Class Action Complaint and the derivative 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 - ------ ------------- 10.1 Amendment, dated as of March 15, 2004, to the Employment Agreement, dated October 22, 1999, as amended, by and between the Company and Martha Stewart 10.2 Amendment, dated as of March 15, 2004, to the Location Rental Agreement, dated October 22, 1999, as amended, by and between the Company and Martha Stewart 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 March 4, 2004, the Company filed a Current Report on Form 8-K reporting its earnings for its fiscal fourth quarter ended December 31, 2003. On March 9, 2004, the Company filed a Current Report on Form 8-K providing a transcript of its fiscal fourth quarter earnings conference call held on March 4, 2004. -21- 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 1, 2004 /s/ James Follo ---------------------------------------------- Name: James Follo Title: Executive Vice President, Chief Financial and Administrative Officer -22- EX-10.1 2 y68173exv10w1.txt AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.1 AMENDMENT TO THE EMPLOYMENT AGREEMENT AS AMENDED BY AND BETWEEN THE COMPANY AND MARTHA STEWART AMENDMENT, dated as of March 15, 2004 (this "Amendment") to the Employment Agreement, dated October 22, 1999, as amended (the "Agreement"), by and between Martha Stewart Living Omnimedia, Inc. (the "Company"), a Delaware corporation, and Martha Stewart (the "Executive"). Capitalized terms used in this Amendment but not defined herein shall have the meanings provided in the Agreement. W I T N E S S E T H: WHEREAS, the parties hereto entered into the Agreement in connection with the Company's initial public offering; WHEREAS, the Executive was the founder of the Company's predecessor entity and has been instrumental in the growth of the Company since its inception; WHEREAS, until June 4, 2003, the Executive served as the Company's Chairman of the Board and Chief Executive Officer; WHEREAS, on June 4, 2003, the Executive voluntarily resigned as Chairman of the Board and Chief Executive Officer of the Company and the parties agreed to the Executive's continuation of her employment with the Company as its Chief Creative Officer; WHEREAS, on March 15, 2004, the Executive voluntarily resigned her positions as a director and Chief Creative Officer of the Company and assumed the position of Founding Editorial Director; WHEREAS, the Company recognizes that the Executive's creative talents and contributions to the Company are unique and have been integral to the success of the Company and that continuing to have the benefit of Executive's unique creative talents and contributions is in the best interests of the Company and its shareholders; WHEREAS, the parties agree that it is in the best interests of the Company and its shareholders for the Executive to continue her employment with the Company as its Founding Editorial Director, a non-officer position; and WHEREAS, the parties desire to amend the Agreement to reflect the changes in the Executive's position and responsibilities; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Section 1 (Employment). Section 1 of the Agreement is hereby amended and restated as follows: "Effective as of March 15, 2004, the Company hereby agrees to continue the employment of the Executive in the position of Founding Editorial Director of the Company, and the Executive hereby agrees to continue her employment in such capacity, on the terms and conditions set forth below." 2. Amendments to Section 3 (Position and Duties). The first two sentences of Section 3 of the Agreement are hereby amended and restated as follows: "Effective as of March 15, 2004 and until the end of the Employment Period, the Executive shall serve as the Founding Editorial Director of the Company, with the duties, authority and responsibilities described on Schedule A. The Executive shall report to the Chief Executive Officer of the Company." 3. Amendments to Section 6(d) (Termination - Good Reason). The second sentence of Section 6(d) of the Agreement is hereby amended by deleting the words "or her approval in her capacity as the Chairman of the Board". 4. Continuing Effect of the Agreement. This Amendment shall not constitute an amendment of any provision of the Agreement not expressly referred to herein. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. 5. Counterparts. This Amendment may be executed by the parties hereto in separate counterparts (including facsimile counterparts), each of which shall be deemed to be an original, and which taken together shall be deemed to constitute one and the same instrument. 6. No Waiver. It is understood and acknowledged that none of the changes to the Agreement effected by this Amendment and no action or inaction by any party in connection therewith shall be construed as a waiver of any rights of the Executive or the Company arising under any agreement between the Executive and the Company or under applicable law all of which are expressly reserved. 7. Governing Law. This Amendment shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, without regard to its conflict of laws or choice of laws principles. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. MARTHA STEWART LIVING OMNIMEDIA, INC. By: /s/ Sharon Patrick -------------------------------- Name: Sharon Patrick Title: President & Chief Executive Officer EXECUTIVE /s/ Martha Stewart -------------------------------- Martha Stewart EX-10.2 3 y68173exv10w2.txt AMENDMENT TO LOCATION RENTAL AGREEMENT EXHIBIT 10.2 AMENDMENT TO THE LOCATION RENTAL AGREEMENT AS AMENDED BY AND BETWEEN THE COMPANY AND MARTHA STEWART THIS SECOND AMENDMENT TO THE LOCATION RENTAL AGREEMENT, dated as of March 15, 2004 (the "Amendment"), by and between Martha Stewart Living Omnimedia, Inc. ("MSLO"), a Delaware corporation, and Martha Stewart ("Stewart"), a natural person (each of MSLO and Stewart, a "Party"). Capitalized terms used in the Amendment but not defined herein shall have the meanings provided in the Agreement. W I T N E S S E T H: WHEREAS, the Parties wish to amend that certain location rental agreement entered into by and between MSLO and Stewart as of October 22, 1999, as amended (the "Agreement"); NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Section 1 of the Agreement is hereby amended to read as follows: "The term of this Agreement shall commence on the date hereof and continue until July 4, 2004, unless this Agreement is terminated pursuant to Section 7 hereof. " 2. Section 2 of the Agreement is amended by adding the following to the final sentence of the Section: "; provided, however, that for the period from January 1, 2004 to July 4, 2004, MSLO shall pay a pro rata portion of the Annual Rental Fee in advance in six equal monthly installments of $208,333 and a final installment of $26,882 for the period commencing July 1, 2004 and ending July 4, 2004." 3. The Amendment shall not constitute an amendment of any provision of the Agreement not expressly referred to herein. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. 4. The Amendment may be executed by the parties hereto in separate counterparts (including facsimile counterparts), each of which shall be deemed to be an original, and which taken together shall be deemed to constitute one and the same instrument. 5. It is understood and acknowledged that none of the changes to the Agreement effected by the Amendment and no action or inaction by any party in connection therewith shall be construed as a waiver of any rights of Stewart or the Company arising under any agreement between Stewart and the Company or under applicable law all of which are expressly reserved. 6. The Amendment shall be governed by, and construed and interpreted in accordance with, the laws of the State of Delaware, without regard to its conflict of laws or choice of laws principles. IN WITNESS WHEREOF, the parties hereto have executed and delivered the Amendment as of the date first above written. MARTHA STEWART LIVING OMNIMEDIA, INC. By: /s/ Sharon Patrick -------------------------------------------- Name Sharon Patrick Title: President & Chief Executive Officer /s/ Martha Stewart -------------------------------------------- Martha Stewart EX-31.1 4 y68173exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Sharon Patrick, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q/A 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 1, 2004 /s/ Sharon Patrick ------------------------------------------- Sharon Patrick President & Chief Executive Officer EX-31.2 5 y68173exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, James Follo, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q/A 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 1, 2004 /s/ James Follo ------------------------------------------- James Follo Chief Financial and Administrative Officer -29- EX-32 6 y68173exv32.txt 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/A for the quarter ended March 31, 2004 (the "Form 10-Q/A") 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/A fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 1, 2004 /s/ Sharon Patrick ------------------------------------------- Sharon Patrick President & Chief Executive Officer Dated: November 1, 2004 /s/ James Follo ------------------------------------------- James Follo Chief Financial and Administrative Officer -----END PRIVACY-ENHANCED MESSAGE-----