10-Q 1 y68517e10vq.txt 10-Q 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, 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 as of November 5, 2004 Class A, $0.01 par value 20,665,381 Class B, $0.01 par value 29,422,860 ---------- Total 50,088,241 ==========
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 14 Item 4. Controls and Procedures 28 Part II. Other Information Item 1. Legal Proceedings 28 Item 6. Exhibits and Reports on Form 8-K 30 Signatures 31
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, 2004 2003 ------------- ------------ ASSETS (unaudited) CURRENT ASSETS Cash and cash equivalents $ 112,306 $ 165,566 Short-term investments 38,891 3,100 Accounts receivable, net 15,233 39,758 Inventories, net 8,093 7,485 Deferred television production costs 25 3,465 Income taxes receivable 533 5,658 Deferred income taxes 1,270 5,024 Other current assets 2,947 4,422 --------- ---------- TOTAL CURRENT ASSETS 179,298 234,478 --------- ---------- PROPERTY, PLANT AND EQUIPMENT, net 18,593 22,673 INTANGIBLE ASSETS, net 54,263 44,257 DEFERRED INCOME TAXES 3,224 3,224 OTHER NONCURRENT ASSETS 6,844 4,470 --------- ---------- TOTAL ASSETS $ 262,222 $ 309,102 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities 26,180 26,628 Accrued payroll and related costs 10,761 10,360 Income taxes payable 1,029 167 Current portion of deferred subscription income 23,845 23,833 --------- ---------- TOTAL CURRENT LIABILITIES 61,815 60,988 DEFERRED SUBSCRIPTION INCOME 8,342 7,133 OTHER NONCURRENT LIABILITIES 4,227 4,316 --------- ---------- TOTAL LIABILITIES 74,384 72,437 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 20,378 and 19,628 shares outstanding in 2004 and 2003, respectively 204 196 Class B common stock, $.01 par value, 150,000 shares authorized; 29,423 and 30,059 outstanding in 2004 and 2003, respectively 294 301 Capital in excess of par value 186,879 183,744 Unamortized restricted stock - (307) Retained earnings 1,236 53,506 --------- ---------- 186,613 237,440 Less: Class A treasury stock - 59 shares at cost (775) (775) --------- ---------- TOTAL SHAREHOLDERS' EQUITY 187,838 236,665 --------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 262,222 $ 309,102 ========= ==========
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 2004 2003 (as restated see (as restated see (as restated see 2004 note 2) note 2) note 2) -------- ---------------- ---------------- ----------------- REVENUES Publishing $ 22,273 $ 29,147 $ 69,905 $ 102,825 Television 2,203 6,579 9,436 19,782 Merchandising 8,014 8,852 29,706 30.943 Internet/Direct Commerce 6,201 6,602 18,179 21,436 -------- -------- --------- --------- TOTAL REVENUES 38,691 51,180 127,226 174,986 -------- -------- --------- --------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 27,405 31,442 86,757 102,492 Selling and promotion 12,472 11,867 38,845 34,714 General and administrative 12,310 12,124 43,696 39,959 Amortization of non-cash stock compensation expense 991 143 3,471 410 Depreciation and amortization 1,667 1,885 4,976 6,080 -------- -------- --------- --------- TOTAL OPERATING COSTS AND EXPENSES 54,845 57,461 177,745 183,655 -------- -------- --------- --------- OPERATING LOSS (16,154) (6,281) (50,519) (8,669) Interest income, net 511 293 1,192 1,090 -------- -------- --------- --------- LOSS BEFORE INCOME TAXES (15,643) (5,988) (49,327) (7,579) Income tax benefit (provision) 806 2,172 (2,526) 3,080 -------- -------- --------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS (14,837) (3,816) (51,853) (4,499) Loss from discontinued operations, net of tax benefit (129) (122) (417) (644) -------- -------- --------- --------- NET LOSS $(14,966) $ (3,938) $ (52,270) $ (5,143) ======== ======== ========= ========= LOSS PER SHARE - BASIC AND DILUTED Loss from continuing operations $ (0.30) $ (0.08) $ (1.05) $ (0.09) -------- -------- --------- --------- Loss from discontinued operations (0.00) (0.00) (0.01) (0.01) -------- -------- --------- --------- Net loss $ (0.30) $ (0.08) $ (1.05) $ (0.10) -------- -------- --------- --------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 49,698 49,537 49,578 49,553
The accompanying notes are an integral part of these condensed consolidated financial statements 4 Martha Stewart Living Omnimedia, Inc. Consolidated Statement of Shareholders' Equity For the Nine Months Ended September 30, 2004 (unaudited, in thousands)
Capital in Class A Common Class B Common Excess Unamortized Class A Stock Stock of Par Restricted Retained Treasury stock 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 for the period - - - - - - (52,270) - - (52,270 Conversion of shares 486 5 (486) (5) - - - - - - Issuance of shares for stock option exercises 279 3 - - 593 - - - - 596 Shares returned on a net treasury basis - - (150) (2) 2 - - - - - Return of restricted stock (15) - - - (102) 102 - - - - Amortization of restricted stock - - - - 2,642 205 - - - 2,847 ----------------------------------------------------------------------------------------------------------------- Balance at September 30, 2004 20,378 $204 29,423 $294 $186,879 $ - $ 1,236 (59) $(775) $ 187,838 =================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Statements of Cash Flows (unaudited, in thousands)
Nine Months Ended September 30, --------------------------------- 2004 2003 ---------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (52,270) $ (5,143) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,976 6,080 Amortization of restricted stock units and restricted stock 3,471 410 Deferred income tax expense 3,754 - Changes in operating assets and liabilities 29,206 (4,070) ---------- -------- NET CASH USED IN OPERATING ACTIVITIES (10,863) (2,723) ---------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (810) (1,008) Purchases of short-term investments (36,291) - Sales of short-term investments 500 13,556 Acquisitions of businesses, net of cash acquired (6,392) - ---------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (42,993) 12,548 ---------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received from stock option exercises 596 177 ---------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 596 177 ---------- -------- NET INCREASE (DECREASE) IN CASH (53,260) 10,002 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,566 131,664 ---------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $112,306 $141,666 ========== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company's consolidated financial statements. c. Intangible Assets Commencing January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets." Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to annual assessment for impairment by applying a fair-value based test. In August 2004, the Company acquired certain intangible assets in connection with business acquisitions discussed in footnote 5. The allocation of the acquisition purchase price is preliminary. The Company will finalize the purchase price allocation of the fair value of net assets acquired based upon receipt of a pending asset appraisal. The components of intangible assets are as follows:
Accumulated Accumulated amortization amortization Publishing -publishing Subscriber -subscriber goodwill goodwill lists lists Total -------------------------------------------------------------------------------- Balance at January 1, 2004 $59,009 $(14,752) - - $44,257 Acquisitions of businesses 9,482 - 606 10,088 Amortization expense (82) (82) -------------------------------------------------------------------------------- Balance at September 30, 2004 $68,491 $(14,752) $606 $(82) $54,263 ================================================================================
7 d. 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 $21,915 in the first nine months 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. The Company has reached final settlement with the Internal Revenue Service ("IRS") related to the 1999 audit of the Company's consolidated federal income tax return. Resolution of the examination did not have a material effect on our consolidated financial position, results of operations, or liquidity. The Company currently has recorded an accrual of $0.6 million as of September 30, 2004 for income tax liabilities related to ongoing federal, state, and local audits. e. Reclassifications Certain prior year financial information has been reclassified to conform with fiscal 2004 financial statement presentation. 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 values 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 September 30,:
2004 2003 ------ ------ risk-free interest rates 2.73% 3.60% dividend yields Zero Zero expected volatility 153% 140% expected option life 3 years 6 years average fair market value per option granted $ 8.72 $ 7.38
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 loss, as reported for the three and nine month periods ended September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2004 2003 2004 2003 -------- -------- --------- -------- Net loss, as reported $(14,966) $ (3,938) $ (52,270) $ (5,143) -------- -------- --------- -------- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,050) (2,535) (1,527) (7,594) -------- -------- --------- --------
8 Pro forma net loss $(16,016) $(7,900) $ (53,797) $ (17,010) ======== ======== ========= ========== Loss per share: Basic and diluted - as reported $ (0.30) $ (0.08) $ (1.05) $ (0.10) Basic and diluted - pro forma $ (0.32) $ (0.13) $ (1.09) $ (0.26)
2. Restatement Relating to Interim Subscription Acquisition Costs. The Company has recently 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. The change in accounting policy has no impact on full-year results of operations or earnings (loss) per share. Following are the changes presented in tabular format for the prior year period. Current year amounts have been presented using the revised methodology.
Three Months Ended September 30, 2003 --------------------------------------------- As reported** Adjustment Restated --------------------------------------------- INCOME STATEMENT Selling and promotion $ 11,766 $ 101 $ 11,867 Operating loss (6,180) (101) (6,281) Income tax benefit 2,169 3 2,172 Net loss (3,840) (98) (3,938) Loss per share $ (0.08) $ (0.00) $ (0.08)
Nine Months Ended September 30, 2003 --------------------------------------------- As reported** Adjustment Restated --------------------------------------------- INCOME STATEMENT Selling and promotion 38,259 (3,545) $ 34,714 Operating income (loss) (12,214) 3,545 (8,669) Income tax benefit (provision) 4,353 (1,273) 3,080 Net income (loss) (7,415) 2,272 (5,143) Income (loss) per share (0.15) 0.05 $ (0.10)
Three Months Ended December 30, 2003 --------------------------------------------- As reported Adjustment Restated --------------------------------------------- INCOME STATEMENT Selling and promotion $ 13,388 $ 3,545 $ 16,933 Operating income (loss) 5,809 (3,545) 2,264 Income tax benefit (provision) (1,310) 1,273 (37) Net income (loss) 4,644 (2,272) 2,372 Income (loss) per share $ 0.09 $ (0.05) $ 0.05
3. Inventories The components of inventories are as follows: ------------ ** Certain prior year financial information has been reclassified to conform with fiscal 2004 financial statement presentation. 9
September 30, December 31, 2004 2003 ------------- ------------ Paper $5,498 $ 4,610 Product merchandise 4,048 4,801 ------ ------- 9,546 9,411 Less: reserve for obsolete and excess inventory 1,453 1,926 ------ ------- $8,093 $ 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 includes the determinants of basic loss per share and, in addition, gives effect to potentially dilutive common shares. For the three and nine month periods ended September 30, 2004 and 2003, the following options were excluded from the calculation of loss per share as their inclusion would be antidilutive:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ----------------------------- 2004 2003 2004 2003 ------- --------- ------- --------- Options and restricted stock excluded 412,060 4,282,918 462,573 4,154,139 ------- --------- ------- ---------
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 operations. The Television segment consists of the Company's television production operations that produce television programming that airs in syndication and on cable. 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, which will be discontinued by year-end 2004, its direct-to-consumer floral business and the website marthastewart.com. The Company believes operating income before depreciation and amortization, including the amortization of non-cash stock compensation, ("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 Nine Months Ended September 30, September 30, (unaudited) (unaudited) --------------------- --------------------- 2004 2003(a) 2004 2003(a) --------- -------- --------- -------- OPERATING INCOME (LOSS) Publishing $ (5,577) $ 1,294 $ (13,278) $ 19,247 Television (1,822) (33) (7,300) 196 Merchandising 4,805 4,563 16,608 19,405 Internet/Direct Commerce (2,685) (1,970) (7,790) (14,774) --------- -------- --------- -------- Operating Income (Loss) before Corporate Overhead (5,279) 3,854 (11,760) 24,074 Corporate Overhead (10,875) (10,135) (38,759) (32,743) --------- -------- --------- -------- TOTAL OPERATING LOSS (16,154) (6,281) (50,519) (8,669) --------- -------- --------- -------- DEPRECIATION AND AMORTIZATION Publishing 146 41 269 123 Television 57 236 173 1,015 Merchandising 190 166 570 503 Internet/Direct Commerce 248 235 740 726 Corporate Overhead 1,026 1,207 3,224 3,713 --------- -------- --------- -------- TOTAL DEPRECIATION AND AMORTIZATION 1,667 1,885 4,976 6,080 --------- -------- --------- -------- AMORTIZATION OF NON-CASH STOCK COMPENSATION EXPENSE (BENEFIT) Publishing 27 50 129 152 Merchandising (97) 13 (72) 38 Internet/Direct Commerce - 1 - (21) Corporate Overhead 1,061 79 3,414 241 --------- -------- --------- -------- TOTAL AMORTIZATION OF NON-CASH STOCK COMPENSATION EXPENSE 991 143 3,471 410 --------- -------- --------- -------- OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION AND AMORTIZATION OF NON-CASH STOCK COMPENSATION Publishing (5,404) 1,385 (12,880) 19,522 Television (1,765) 203 (7,127) 1,211 Merchandising 4,898 4,742 17,106 19,946 Internet/Direct Commerce (2,437) (1,734) (7,050) (14,069) --------- -------- --------- -------- Operating Income (Loss) before Depreciation and Amortization and Amortization of Non-Cash Stock Compensation and before Corporate Overhead (4,708) 4,596 (9,951) 26,610 Corporate Overhead ( 8,788) (8,849) (32,121) (28,789) --------- -------- --------- -------- TOTAL OPERATING LOSS BEFORE DEPRECIATION AND AMORTIZATION AND AMORTIZATION OF NON-CASH STOCK COMPENSATION $ (13,496) $ (4,253) $ (42,072) $ (2,179) ========= ======== ========= ========
(a) As restated, see note 2. 11 6. Business Acquisitions In August 2004, the Company acquired certain assets and liabilities of Body & Soul magazine and Dr. Andrew Weil's Self Healing newsletter, which are publications featuring "natural living" content. The primary purpose of the acquisition was to enter a new market and to launch "natural living " as a new "omni" lifestyle category and brand for the Company. Consistent with SFAS No. 141, "Business Combinations," the acquisitions were accounted for under purchase accounting. In connection with the acquisition of the Body & Soul net assets, the Company recorded tangible assets of $0.6 million, an intangible subscriber list of $0.2 million, and liabilities assumed of $2.6 million based on estimated fair values as determined by management utilizing information available at this time. Goodwill of $6.5 million was recognized as the excess of the purchase price over the preliminary estimate of fair market value of assets acquired. In connection with the acquisition of Dr. Andrew Weil's Self Healing newsletter net assets, the Company recorded tangible assets of $0.4 million, an intangible subscriber list of $0.4 million, and liabilities assumed of $2.0 million based on estimated fair values as determined by management utilizing information available at this time. Goodwill of $3.0 million was recognized as the excess of the purchase price over the preliminary estimate of fair market value of assets acquired. The intangible subscriber lists are subject to a twelve month amortization period. For both the three and nine month periods ended September 30, 2004 approximately $0.1 million was charged to amortization expense and accumulated amortization. For each acquisition, the Company will finalize the purchase price allocation of the fair value of net assets acquired based upon receipt of a pending asset appraisal. Unaudited pro forma information related to these acquisitions is not included, since the impacts of these transactions are not material to the consolidated results of the Company. 7. Employee Benefit Plan During 2003, the Company adopted the 2003 Key Executive Bonus Plan. Under the plan, the Company has made and will continue to make periodic cash payments to certain executives who remain employed by the Company. The plan expires on December 31, 2004 and the remaining payments under the plan will be paid shortly thereafter. The Company is recognizing the expected total expense of the plan ratably over the term of the plan. The following summarizes the expense recognized related to the plan:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- -------------------------- 2004 2003 2004 2003 ------ ---- ------- ----- Amount recognized as expense, including in general and administrative $ 713 $ - $ 2,368 $ - ------ ---- ------- -----
The Company expects to recognize an additional expense of approximately $0.7 during the three month period ended December 31, 2004 related to the plan. In July 2004, $1.9 million was paid under the plan and the Company expects to pay up to $1.7 million in January 2005, representing the remaining amount due under the plan. 8. Related Party Transaction Martha Stewart has submitted a claim, pursuant to the Corporation's By-laws, for approximately $3.7 million, for reimbursement of certain legal expenses relating to her defense of the count of the federal criminal complaint against her alleging she made false and misleading statements intended to influence the price of the Corporation's stock. 12 Ms. Stewart's defense of this count was successful and a judgment of acquittal was entered in her favor. The Corporation and Ms. Stewart have agreed in principle to submit the question of whether or not she is entitled to indemnification to an independent expert on Delaware law. If the independent expert determines that Ms. Stewart is entitled to indemnification, the Corporation believes that the amount reimbursed to Ms. Stewart would be reimbursable to the Corporation under its Directors & Officers insurance policy and, accordingly, does not believe that the claim will result in an expense to the Corporation. 9. 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, (unaudited) September 30, (unaudited) -------------------------- -------------------------- 2004 2003 2004 2003 ------ ------ ------ ------ Revenues $ - $ (55) $ - $ 526 Loss from operations, including restructuring and shutdown costs, before income tax benefit in 2003 (129) (202) (417) (1,006) Income tax benefit - 80 - 362 Loss from discontinued operations, net of income tax benefit in 2003 $ (129) $ (122) $ (417) $ (644)
10. Supplemental cash flow information:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2004 2003 2004 2003 -------- ------ -------- ------ Cash paid (refunded) for income taxes $ (6,993) - $ (6,978) $1,529 Cash paid for interest was immaterial in the periods presented.
13 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. 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 and several brand labels are closely associated with the name Martha 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 resulting negative publicity. Although difficult to quantify with any precision, we believe that the uncertainty and publicity surrounding these matters contributed substantially to the adverse trends our business has experienced since June 2002. 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. A new Chairman and CEO assumed those positions. 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. 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. On July 16, 2004, Ms. Stewart was sentenced to five months in prison and two years of supervised release, which includes five months of home confinement to be served immediately upon release from prison. Ms. Stewart began serving her sentence on October 8, 2004. The Company continues to evaluate the impact of these events on its employees, the responses of customers, advertisers, and business partners in order to asses the potential effect on the Company's operating 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 has already implemented a number of business initiatives and may consider a broad range of additional business initiatives and strategic alternatives. These may include, without limitation, changes in core content areas, new business initiatives, development of new expert personalities, disposition of certain products, assets and businesses, as well as certain other business efficiencies. Although we are unable to predict the full effect of the outcome of Ms. Stewart's trial and related sentencing on our business, we continue to experience declines in advertising revenues since the trial outcome, principally in our publishing segment. We may experience further material adverse impacts as a result of the trial outcome, including, without limitation, additional revenue declines, additional expenses relating to corporate communications and corporate professional fees and loss of key personnel. For the nine month period ended September 30, 2004, we suffered a net loss of $52.3 million compared to a net loss of $5.1 million in the same period of the prior year. We may sustain substantial operating losses in future periods and our cash position may be materially adversely affected. However, we are now becoming more optimistic regarding a print based advertising recovery, beginning in the second quarter of 2005. The operations of our television segment have been dramatically reduced in 2004. The segment now primarily consists of a cable television distribution agreement with The Style Network, a weekly syndicated program - Petkeeping with Marc Marrone and beginning in January 2005 a weekly show airing on PBS stations nationwide. Previously, the segment included our nationally syndicated daily show, Martha Stewart Living, as well as several other cable television shows. Given the change in operations, we expect to report continued losses in the Television 14 segment in the fourth quarter of 2004. In September 2004 we entered into agreements with Mark Burnett, a well regarded producer of prime-time programming, and an affiliated entity under which Mr. Burnett will advise and consult with the company regarding various television matters, including developing opportunities to evolve the future Martha Stewart Living daily syndicated television show and relating to the development and production of a primetime network television series to feature Martha Stewart. In connection with the consulting agreement, MSO issued to Mr. Burnett a warrant to purchase up to 2.5 million shares of MSO's Class A Common Stock at an exercise price of $12.59 per share. The warrant will vest and become exercisable in tranches, subject to the achievement of various milestones relating to the broadcast of a primetime network television series and production of a new series of Martha Stewart Living or a successor program. We currently expect to begin to recognize as an expense, a portion of the 2.5 million shares in September 2005, when certain programs are expected to air. On April 22, 2004, we reached an agreement with Kmart to amend the terms of our contract and executed certain releases with respect to a legal action Kmart filed against the Company on February 11, 2004. 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 $49.0 million from $53.4 million previously. We continue to expect that the minimum guaranteed royalty payments will exceed actual royalties earned from retail sales through January 31, 2008. For the contract years ending January 31, 2009 and 2010 (the extension years), the minimum guarantees will be substantially lower than in prior years. The specific computation is discussed in the paragraph below. The following table sets forth the minimum guarantees as contained in our contract with Kmart Corporation. ($ in millions) 1/31/02 1/31/03 1/31/04 1/31/05 1/31/06 1/31/07 1/31/08 Minimum Royalty Amounts $ 15.3 $ 40.4 $ 47.5 $ 49.0 $ 54.0 $ 59.0 $ 65.0
Furthermore, for the year ending January 31, 2009 the minimum royalty amount is the greater of $20 million or 50% of the earned royalty for the year ending January 31, 2008. For the year ending January 31, 2010 the minimum royalty amount is the greater of $15 million or 50% of the earned royalty for the year ending January 31, 2009. Furthermore, $3.8 million of the January 31, 2005 and January 31, 2006 minimum royalty payments and $2.5 million of the January 31, 2007 and January 31, 2008 minimum royalty payments, but not more than $10.0 in the aggregate over the term of the agreement, will be deferred and subject to recoupment in the periods ending January 31, 2009 and January 31, 2010. In August 2004, we decided to discontinue the Catalog for Living and its online product offerings, which is included in the Internet/ Direct Commerce segment, by year-end 2004. This will result in lower revenues in this segment beginning in 2005, a reduction in operating expenses and therefore a lower operating loss in the segment. We do not expect any significant charges to operating results in the future due to the discontinuance of our commerce operations in this segment. 15 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, 2004 TO THREE MONTHS ENDED SEPTEMBER 30, 2003 PUBLISHING SEGMENT
2003 (unaudited,as 2004 restated see (unaudited) note 8) Variance ----------- ------------- --------- PUBLISHING REVENUE Advertising $ 7,501 $ 15,582 $ (8,081) Circulation 14,335 13,724 611 Other 437 (159) 596 ----------- ------------- --------- TOTAL PUBLISHING SEGMENT REVENUE 22,273 29,147 (6,874) ----------- ------------- --------- PUBLISHING OPERATING COSTS AND EXPENSES Production, distribution and editorial 15,343 16,687 1,344 Selling and promotion 11,677 10,743 (934) General and administrative 657 332 (325) Amortization of non-cash compensation expense 27 50 23 Depreciation and amortization 146 41 (105) ----------- ------------- --------- TOTAL PUBLISHING OPERATING COSTS AND EXPENSES 27,850 27,853 3 ----------- ------------- --------- OPERATING INCOME (LOSS) $ (5,577) $ 1,294 $ (6,871) ----------- ------------- ---------
Publishing revenues decreased $6.9 million, or 23.6%, to $22.3 million for the three months ended September 30, 2004, from $29.1 million for the three months ended September 30, 2003. This decrease was primarily due to a decrease in advertising revenues of $8.1 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 decrease in advertising revenue in Martha Stewart Living magazine was $9.4 million. This decrease in advertising revenue was partially offset by an increase in advertising revenue in our Special Interest Publications ("SIP") which was due in part to an increase in frequency in the quarter (presented in the table below). Advertising revenue in the quarter also benefited from the inclusion of two issues of Body & Soul magazine, which we acquired in August 2004. Circulation revenue increased in the quarter, with higher circulation revenues from Everyday Food and an increase in frequency of our SIP's, as well as the benefit of the acquisition of Body & Soul magazine and The Dr. Weil Self Healing newsletter, partially offset by lower revenue from Martha Stewart Living. Magazine Publication Schedule
Third Quarter 2004 Third Quarter 2003 --------------------------------------------------------------------------------------------------------------- Martha Stewart Living Three Issues Three Issues Martha Stewart Weddings No Issue No Issue Everyday Food Two Issues Two Issues Special Interest Publications Three Issues One Issue Body & Soul (a) Two Issues n/a
16 (a) Acquired in August 2004 and therefore was not included in prior periods. Production, distribution and editorial expenses decreased $1.3 million primarily reflecting lower paper, printing and distribution costs of Martha Stewart Living magazine, due primarily to a lower number of pages printed per issue and lower circulation, partially offset by the additional costs associated with the publication of additional SIP's and the acquisition referred to above. Selling and promotion expenses increased $0.9 million primarily due to higher circulation acquisition costs relating to Everyday Food, our recent marketing campaign and the recent acquisition. TELEVISION SEGMENT
2004 2003 (unaudited) (unaudited) Variance ----------- ----------- -------- TELEVISION REVENUE Syndication $ 1,384 $ 4,746 $ (3,362) Licensing and other 819 1,833 (1,014) ----------- ----------- -------- TOTAL TELEVISION SEGMENT REVENUE 2,203 6,579 (4,376) ----------- ----------- -------- TELEVISION OPERATING COSTS AND EXPENSES Production, distribution and editorial 3,036 4,985 1,949 Selling and promotion 125 475 350 General and administrative 807 916 109 Depreciation and amortization 57 236 179 ----------- ----------- -------- TOTAL TELEVISION OPERATING COSTS AND EXPENSES 4,025 6,612 2,587 ----------- ----------- -------- OPERATING INCOME (LOSS) $ (1,822) $ (33) $ (1,789) ----------- ----------- --------
Television revenues decreased $4.4 million, or 66.5%, to $2.2 million for the quarter ended September 30, 2004, from $6.6 million for the quarter ended September 30, 2003, primarily due to lower revenue from our syndicated daily program which ceased airing in mid September. The ending of the show will negatively impact revenue in future periods. The segment was also impacted by the expiration of certain cable and international licensing contracts effective December 31, 2003. Future quarters will be adversely impacted by the recent termination of our contract with the Food Network. Revenue in the quarter benefited from the June launch of our programming on The Style Network, and the September 2003 launch of our half-hour syndicated program, Petkeeping with Marc Maronne. Production, distribution and editorial expenses as well as selling and promotion expenses decreased in the period due to the cessation of production of our nationally syndicated daily show, Martha Stewart Living. Depreciation and amortization decreased $0.2 million primarily due to a reduction in the net carrying value of certain assets in our Connecticut television studio in the fourth quarter of 2003. 17 MERCHANDISING SEGMENT
2004 2003 (unaudited) (unaudited) Variance ----------- ----------- -------- MERCHANDISING REVENUE Kmart earned royalty $ 6,849 $ 7,161 $ (312) Other 1,165 1,691 (526) ----------- ----------- -------- TOTAL MERCHANDISING SEGMENT REVENUE 8,014 8,852 (838) ----------- ----------- -------- MERCHANDISING OPERATING COSTS AND EXPENSES Production, distribution and editorial 1,711 2,862 1,151 Selling and promotion 197 147 (50) General and administrative 1,208 1,101 (107) Amortization of non-cash compensation expense (97) 13 110 Depreciation and amortization 190 166 (24) ----------- ----------- -------- TOTAL MERCHANDISING OPERATING COSTS AND EXPENSES 3,209 4,289 1,080 ----------- ----------- -------- OPERATING INCOME $ 4,805 $ 4,563 $ 242 ----------- ----------- --------
Merchandising revenues decreased $0.8 million, or 9.5%, to $8.0 million for the quarter ended September 30, 2004, from $8.9 million for the quarter ended September 30, 2003, primarily due to lower sales of our Martha Stewart Everyday product at Kmart due to lower same-store-sales. The revenue decline was partially offset by an increase in the royalty rate on a year-over-year basis. The royalty rate under our agreement with Kmart increased 5% on February 1, 2004. Royalty revenue from Kmart was recorded based on actual sales in the current and prior year periods. We expect the minimum guarantees will exceed actual royalties earned from retail sales for the foreseeable future primarily due to store closings and recent negative trends in same-store sales. Other revenue declined in the quarter principally due to a decline in royalty revenue from our Japanese retail partner, partially offset by revenue from our Everyday program at Sears Canada. Our program at Sears Canada launched in the second half of 2003. Production, distribution and editorial expenses decreased $1.1 million in the period due to lower compensation related expense. 18 INTERNET/DIRECT COMMERCE SEGMENT
2004 2003 (unaudited) (unaudited) Variance ----------- ----------- -------- INTERNET/DIRECT COMMERCE REVENUE Product $ 5,978 $ 6,350 $ (372) Other 223 252 (29) ----------- ----------- -------- TOTAL INTERNET/DIRECT COMMERCE SEGMENT REVENUE 6,201 6,602 (401) ----------- ----------- -------- INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES Production, distribution and editorial 7,223 6,810 (413) Selling and promotion 447 471 24 General and administrative 968 1,055 87 Amortization of non-cash compensation expense - 1 1 Depreciation and amortization 248 235 (13) ----------- ----------- -------- TOTAL INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES 8,886 8,572 (314) ----------- ----------- -------- OPERATING INCOME (LOSS) $ (2,685) $ (1,970) $ (715) ----------- ----------- --------
Internet/Direct Commerce revenues decreased $0.4 million, to $6.2 million for the three months ended September 30, 2004, from $6.6 million for the three months ended September 30, 2003, due to lower commerce sales related to our catalog offerings, partially offset by higher revenue from our direct-to-consumer floral business. The decline in commerce revenue was attributable to lower catalog circulation in the period. Given our decision to discontinue the Catalog for Living and its online product offerings by year-end 2004, we expect to see a further reduction in revenue and a reduced operating loss in this segment. Production, distribution and editorial costs increased $0.4 million primarily due to difficult comparisons with the year-ago period. The prior year period benefited from the successful disposition of previously written down obsolete and slow moving inventory which increased gross margins in that period. The higher costs were partially offset by lower compensation expense due to the wind-down of the catalog portion of our commerce business. CORPORATE
2004 2003 (unaudited) (unaudited) Variance ----------- ----------- -------- CORPORATE OPERATING COSTS AND EXPENSES Production, distribution and editorial $ 92 $ 98 $ 6 Selling and promotion 26 31 5 General and administrative 8,670 8,720 50 Amortization of non-cash compensation expense 1,061 79 (982) Depreciation and amortization 1,026 1,207 181 ----------- ----------- -------- TOTAL CORPORATE OPERATING COSTS AND EXPENSES 10,875 10,135 (740) ----------- ----------- -------- OPERATING LOSS $ (10,875) $ (10,135) $ (740) ----------- ----------- --------
19 General and administrative expenses was essentially flat in the quarter, with certain changes in compensation, including the cost of additional retention programs, offsetting other compensation related accounts. The increase in the amortization of non-cash compensation expense principally relates to the amortization of the value of restricted stock units granted in connection with a November 2003 stock option exchange program. OTHER ITEMS Income tax benefit for the quarter ended September 30, 2004 was $0.8 million, compared to an income tax benefit of $2.2 million for the quarter ended September 30, 2003. The current period provision includes a valuation allowance of $6.3 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 $0.1 million for the quarter ended September 30, 2004 compared to $0.1 million for the quarter ended September 30, 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 $15.0 million for the quarter ended September 30, 2004, compared to a net loss of $3.9 million for the quarter ended September 30, 2003, as a result of the above mentioned factors 20 COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004 TO NINE MONTHS ENDED SEPTEMBER 30, 2003 PUBLISHING SEGMENT
2003 (unaudited, 2004 as restated (unaudited) see note 8) Variance ---------------- ------------ ---------- PUBLISHING REVENUE Advertising $ 24,055 $ 59,059 $ (35,004) Circulation 44,690 42,442 2,248 Other 1,160 1,324 (164) ---------------- ------------ ---------- TOTAL PUBLISHING SEGMENT REVENUE 69,905 102,825 (32,920) ---------------- ------------ ---------- PUBLISHING OPERATING COSTS AND EXPENSES Production, distribution and editorial 45,761 51,353 5,592 Selling and promotion 35,540 30,150 (5,390) General and administrative 1,484 1,800 316 Amortization of non-cash compensation expense 129 152 23 Depreciation and amortization 269 123 (146) ---------------- ------------ ---------- TOTAL PUBLISHING OPERATING COSTS AND EXPENSES 83,183 83,578 395 ---------------- ------------ ---------- OPERATING INCOME (LOSS) $ (13,278) $ 19,247 $ (32,525) ---------------- ------------ ----------
Publishing revenues decreased $32.9 million, or 32.0%, to $69.9 million for the nine months ended September 30, 2004, from $102.8 million for the nine months ended September 30, 2003. This decrease was primarily due to a decrease in advertising revenues of $35.0 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 decrease in advertising revenue in Martha Stewart Living magazine was $28.4 million. The reduction in advertising revenue was also attributable to lower advertising revenue in Everyday Food magazine of $5.2 million, as the prior year's period included advertising revenues from a sponsorship arrangement and lower revenue in Martha Stewart Weddings. Circulation revenue increased $2.2 million in the period primarily due to the increase in circulation and frequency of Everyday Food, as well as an additional issue of Martha Stewart Weddings published in the period, as well as two additional SIP's, partially offset by lower circulation revenue from Martha Stewart Living magazine, due primarily to lower subscription copies sold in the period. The period also benefited from the acquisition of Body & Soul magazine and The Dr. Weil Self Healing newsletter. Magazine Publication Schedule
Nine months ended September 2004 Nine months ended September 2003 ------------------------------------------------------------------------------------------------------------ Martha Stewart Living Nine Issues Nine Issues Martha Stewart Weddings Three Issue Two Issue Everyday Food Eight Issues Six Issues Special Interest Publications Seven Issues Five Issue Body & Soul (a) Two Issues n/a
(a) Acquired in August 2004 and therefore was not included in prior periods. Production, distribution and editorial expenses decreased $5.6 million primarily reflecting lower paper, printing and distribution costs of Martha Stewart Living magazine, due primarily to a lower number of pages printed per issue and lower circulation, partially offset by the additional costs associated with the publication of additional magazines referred to above. Selling and promotion expenses increased $5.4 million resulting primarily from higher circulation 21 acquisition costs relating to Everyday Food, one of our Special Interest Publication's, and the recent acquisition, partially offset by lower spending related to Martha Stewart Living magazine. TELEVISION SEGMENT
2004 2003 (unaudited) (unaudited) Variance ---------- ----------- ----------- TELEVISION REVENUE Syndication $ 7,117 $ 13,978 $ (6,861) Licensing and other 2,319 5,804 (3,485) ---------- ----------- ----------- TOTAL TELEVISION SEGMENT REVENUE 9,436 19,782 (10,346) ---------- ----------- ----------- TELEVISION OPERATING COSTS AND EXPENSES Production, distribution and editorial 12,914 14,065 1,151 Selling and promotion 1,023 1,884 861 General and administrative 2,626 2,622 (4) Amortization of non-cash compensation expense - - - Depreciation and amortization 173 1,015 842 ---------- ----------- ----------- TOTAL TELEVISION OPERATING COSTS AND EXPENSES 16,736 19,586 2,850 ---------- ----------- ----------- OPERATING INCOME (LOSS) $ (7,300) $ 196 $ (7,496) ---------- ----------- -----------
Television revenues decreased $10.3 million, or 52.3%, to $9.4 million for the nine months ended September 30, 2004, from $19.8 million for the nine months ended September 30, 2003. The decrease is primarily attributable to lower revenue from our syndicated daily program, Martha Stewart Living, of $7.6 million due primarily to lower license fees and lower advertising revenue. The decrease was partially offset by revenue from the launch of our programming on The Style Network and from Petkeeping with Marc Marronne. The segment was also impacted by the expiration of certain cable and international licensing contracts effective December 31, 2003, included in licensing above. Future quarters will be adversely impacted by the recent termination of our contract with the Food Network. Production, distribution and editorial expenses decreased $1.2 million in the period due to lower production costs as a result of the winding down of production for the syndicated national show as well as a lower distribution fees associated with the lower license fee revenue from the Martha Stewart Living show, partially offset by higher non-cash production amortization recognized in the period, including a $1.5 million write-down of deferred production costs resulting from the early termination of a cable television licensing agreement. Selling and promotion expenses decreased $0.9 million due to lower marketing efforts for the nationally syndicated daily show due in part to the ending of our daily show on nationally syndicated television. Depreciation and amortization decreased $0.8 million primarily due to a reduction in the net carrying value of certain assets in our Connecticut television studio in the fourth quarter of 2003. The decrease in depreciation will continue into the fourth quarter. 22 MERCHANDISING SEGMENT
2004 2003 (unaudited) (unaudited) Variance ---------- ----------- ----------- MERCHANDISING REVENUE Kmart earned royalty $ 22,713 $ 25,703 $ (2,990) Kmart minimum true-up 2,412 - 2,412 Other 4,581 5,240 (659) ---------- ----------- ---------- TOTAL MERCHANDISING SEGMENT REVENUE 29,706 30,943 (1,237) ---------- ----------- ---------- MERCHANDISING OPERATING COSTS AND EXPENSES Production, distribution and editorial 6,875 7,571 696 Selling and promotion 767 333 (434) General and administrative 4,958 3,093 (1,865) Amortization of non-cash compensation expense (72) 38 110 Depreciation and amortization 570 503 (67) ---------- ----------- ---------- TOTAL MERCHANDISING OPERATING COSTS AND EXPENSES 13,098 11,538 (1,560) ---------- ----------- ---------- OPERATING INCOME $ 16,608 $ 19,405 $ (2,797) ---------- ----------- ----------
Merchandising revenues decreased $1.2 million, or 4.0%, to $29.7 million for the nine months ended September 30, 2004, from $30.9 million for the nine months ended September 30, 2003, primarily due to lower product sales at Kmart as a result of lower same-store-sales as well as Kmart store closings that took place in the early part of 2003. The revenue decline was partially offset by recognizing as revenue the pro-rata portion of the contractual minimum royalty amount due from Kmart for the 12 month period ended January 31, 2004, relating to January 2004 as well as an increase in the royalty rate on a year-over-year basis. The royalty rate under our agreement with Kmart increased 5% on February 1, 2004. We expect the minimum guarantees will exceed actual royalties earned from retail sales for the foreseeable future primarily due to store closings and recent negative trends in same-store sales. Other revenue declined modestly due to a decline in creative service revenue, as well as a decline in revenue from our Japanese retail partner, partially offset by revenue from the launch of our program at Sears Canada and higher royalty revenue from our Martha Stewart Signature products. Our program at Sears Canada launched in the second half of 2003. Production, distribution and editorial expense decreased $0.7 million due to lower compensation related expenses. Selling and promotion expenses increased $0.4 million in the period due to higher marketing expenses related to our Martha Stewart Signature program. General and administrative expense increased $1.9 million primarily due to higher professional fees. 23 INTERNET/DIRECT COMMERCE SEGMENT
2004 2003 (unaudited) (unaudited) Variance ----------- ----------- -------- INTERNET/DIRECT COMMERCE REVENUE Product sale $ 17,704 $ 20,431 $ (2,727) Other 475 1,005 (530) ----------- ----------- -------- TOTAL INTERNET/DIRECT COMMERCE SEGMENT REVENUE 18,179 21,436 (3,257) ----------- ----------- -------- INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES Production, distribution and editorial 20,930 29,205 8,275 Selling and promotion 1,438 1,639 201 General and administrative 2,861 4,661 1,800 Amortization of non-cash compensation expense - (21) (21) Depreciation and amortization 740 726 (14) ----------- ----------- -------- TOTAL INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES 25,969 36,210 10,241 ----------- ----------- -------- OPERATING INCOME (LOSS) $ (7,790) $ (14,774) $ 6,984 ----------- ----------- --------
Internet/Direct Commerce revenues decreased $3.3 million, or 15.2%, to $18.2 million for the nine months ended September 30, 2004, from $21.4 million for the nine months ended September 30, 2003. The decrease was primarily due to lower commerce sales related to our catalog offerings, partially offset by increased revenue from our direct-to-consumer floral business. The decline in commerce sale was largely attributable to our planned lower catalog circulation. The decline in other revenue was principally due to lower advertising revenue. Production, distribution and editorial costs decreased $8.3 million, due to lower catalog production and distribution costs of $3.8 million due to reduced catalog circulation. Lower costs were also due in part to lower product sales, an improved product gross margin and improved fulfillment efficiencies, which collectively contributed to $2.6 million of lower costs in the period. The prior year period benefited from the successful disposition of previously written down obsolete and slow moving inventory which increased gross margins in that period The segment continued to benefit from the restructuring initiated in the first half of 2003, which reduced headcount and lowered technology costs. General and administrative expenses decreased $1.8 million due primarily to lower employee related expenses and lower professional fees. CORPORATE
2004 2003 (unaudited) (unaudited) Variance ----------- ----------- -------- CORPORATE OPERATING COSTS AND EXPENSES Production, distribution and editorial $ 277 $ 298 $ 21 Selling and promotion 77 708 631 General and administrative 31,767 27,783 (3,984) Amortization of non-cash compensation expense 3,414 241 (3,173) Depreciation and amortization 3,224 3,713 489 ----------- ----------- -------- TOTAL CORPORATE OPERATING COSTS AND EXPENSES 38,759 32,743 (6,016) ----------- ----------- -------- OPERATING LOSS $ (38,759) $ (32,743) $ (6,016) ----------- ----------- --------
24 Corporate overhead, including depreciation and amortization and the amortization of non-cash stock compensation increased $6.0 million, or 18.4%, to $38.8 million for the nine months ended September 30, 2004, from $32.7 million for the nine months ended September 30, 2003. Selling and promotion expenses decreased $0.6 million, as the prior year quarter included media spending associated with a corporate advertising program. General and administrative expenses increased $4.0 million principally resulting from higher employee-related costs, including retention programs of $3.4 million as well as higher corporate communications and consulting fees, partially offset by lower insurance and location fees. The increase in the amortization of non-cash compensation expense principally relates to the amortization of the value of restricted stock units granted in connection with a November 2003 stock option exchange program. OTHER ITEMS Income tax benefit (expense). Income tax expense for the nine months ended September 30, 2004 was $2.5 million, compared to an income tax benefit of $3.1 million for the nine months ended September 30, 2003. The current period provision includes a valuation allowance of $21.9 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 $0.4 million for the nine months ended September 30, 2004 compared to $0.6 million for the nine months ended September 30, 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 $52.3 million for the nine months ended September 30, 2004, compared to a net loss $5.1 million for the nine months ended September 30, 2003, as a result of the above mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $112.3 million and $165.6 million and short-term investments were $38.9 million and $3.1 million at September 30, 2004 and December 31, 2003, respectively. Cash flows used in operating activities were $10.9 million and $2.7 million during the nine months ended September 30, 2004 and 2003, respectively. Cash flows used in operating activities during the nine months ended September 30, 2004 were primarily due to a net loss for the period of $52.3 million, partially offset by changes in operating assets and liabilities of $29.2 million, depreciation and amortization of $5.0 million, an increase in the deferred income tax expense of $3.8 million, as well as the amortization of equity based compensation expense of $3.5 million. The changes in operating assets and liabilities include a decrease in accounts receivable due to the collection of a royalty receivable due from Kmart related to our minimum royalty payment, as well as the receipt of our federal income tax refund for calendar 2003. Cash used in operating activities during the nine months ended September 30, 2003 were primarily due to a net loss for the period of $5.1 million and decreases in operating assets and liabilities of $4.1 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. Cash flows used in investing activities were $43.0 million during the nine months ended September 30, 2004, compared to cash provided by investing activities of $12.5 million during the nine months ended September 30, 2003. Cash flows used in investing activities in 2004 resulted from the net purchase of short-term investments of $35.8 million, the acquisition of certain assets of Body & Soul magazine and the Dr. Weil Self Healing newsletter of $6.4 million and as well as capital expenditures $0.8 million. 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. We expect capital expenditures in 2004 to approximate $1.0 million. Cash flows provided by financing activities for the nine month periods ended September 30, 2004 and 2003 were $0.6 and $0.2 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 $5.0 million, which is generally used to secure outstanding letters of credit. As of September 30, 2004, we had no outstanding borrowings under this facility. 25 We believe that our available cash balances and short-term investments 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 and first quarter of 2005, net of amounts required to be deferred, 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, 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 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. Revenues for royalties in our merchandising business are accrued on a monthly basis based on sales volume data provided to us by our strategic partners and payment is generally made by our partners on a quarterly basis. For the nine month period ended September 30, 2004, the Company has recognized royalty revenues earned under our agreement with Kmart based upon actual royalties earned for sales in 2004 and the pro-rata portion of the 2003 minimum guarantee that related to January 2004. 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 2004 and first quarter of 2005, net of amounts required to be deferred, when the amount can be determined. Certain of our other merchandising agreements contain minimum guarantee provisions. These minimum guarantees will be recorded when such amounts are both determinable and deemed collectible. 26 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. The Company has elected to annually test for goodwill impairment in the fourth quarter of its fiscal year. Advertising Cost Advertising costs, consisting primarily of direct-response advertising, are expensed in the period in which the advertising effort takes place. 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 legal proceeding arising from a sale of non-Company stock by Ms. Stewart; a loss of the services of 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 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." 27 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, 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 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 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 28 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 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. By order dated August 4, 2004, the Company's motion to dismiss the Sargent complaint was granted in its entirety, and as to the issue of plaintiffs' failure to make pre-suit demand, with prejudice. The Sargent plaintiffs' time to appeal that dismissal has expired. The Richards action had been stayed by agreement of the parties pending resolution of the Beam appeal by the Delaware Supreme Court. By motion filed June 4, 2004, the plaintiff in the Richards action voluntarily sought an order dismissing the Richards action with prejudice, and that dismissal with prejudice was ordered by the court on June 9, 2004. By stipulation and order entered September 24, 2004, the parties to the Shareholder Derivative Litigation agreed to the dismissal of that action on the same terms as ordered by the Sargent Court in dismissing the Sargent Action. While still in its early stages, we believe the Company has substantial defenses to the remaining Consolidated Class Action Complaint. The Company is unable to predict the outcome of that action or reasonably estimate a range of possible loss at this time. 29 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 Employment Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to the 8-K filed on September 23, 2004). 10.2 Location Rental Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to the 8-K filed on September 23, 2004). 10.3 Letter Agreement dated September 17, 2004 between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to the 8-K filed on September 23, 2004). 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 August 3, 2004, the Company filed a Current Report on Form 8-K reporting its earnings for its fiscal second quarter ended June 30, 2004. On August 5, 2004, the Company filed a Current Report on Form 8-K providing a transcript of its fiscal second quarter earnings conference call held on August 3, 2004. On September 23, 2004, the Company filed a Current Report on Form 8-K disclosing the execution of a new employment agreement and other agreements with Martha Stewart and the issuance of a warrant to Mark Burnett with respect the issuance of up to 2.5 million shares of our Class A common stock. 30 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 9, 2004 /s/ James Follo ----------------------- Name: James Follo Title: Executive Vice President, Chief Financial and Administrative Officer 31