-----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, JJgQvOInqlxI61R/oMiCELXZ1Nq31qoLgAcKIi3UEeP9GZVetHQAuCzci/IjvPnk JdG1Eu+oPOqOA0NHBEqU1Q== 0000950123-05-005990.txt : 20050510 0000950123-05-005990.hdr.sgml : 20050510 20050510113050 ACCESSION NUMBER: 0000950123-05-005990 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 522187059 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15395 FILM NUMBER: 05814652 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 MAIL ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 10-Q 1 y08854e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 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 04, 2005 Class A, $0.01 par value 22,474,335 Class B, $0.01 par value 29,122,860 ---------- Total 51,597,195 ==========
MARTHA STEWART LIVING OMNIMEDIA, INC. Index to Form 10-Q
PAGE ----- Part I. Financial Information Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 4. Controls and Procedures 20 Part II. Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures Certifications
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, 2005 2004 --------- ----------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 85,071 $104,647 Short-term investments 61,930 35,309 Accounts receivable, net 13,840 31,332 Inventories, net 3,864 5,229 Income taxes receivable 5,107 6,321 Other current assets 2,867 3,573 --------- --------- TOTAL CURRENT ASSETS 172,679 186,411 --------- --------- PROPERTY, PLANT AND EQUIPMENT, net 15,966 17,175 INTANGIBLE ASSETS, net 54,130 54,264 OTHER NONCURRENT ASSETS 6,816 6,828 --------- --------- TOTAL ASSETS $ 249,591 $ 264,678 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 20,337 $ 25,604 Accrued payroll and related costs 5,985 9,407 Income taxes payable 403 412 Current portion of deferred subscription income 29,844 27,160 --------- --------- TOTAL CURRENT LIABILITIES 56,569 62,583 --------- --------- DEFERRED SUBSCRIPTION INCOME 7,797 7,668 DEFERRED ROYALTY REVENUE 3,750 3,438 OTHER NONCURRENT LIABILITIES 3,273 3,361 --------- --------- TOTAL LIABILITIES 71,389 77,050 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 22,493 and 21,660 shares outstanding in 2005 and 2004, respectively 225 217 Class B common stock, $.01 par value, 150,000 shares authorized; 29,123 outstanding in 2005 and 2004 291 291 Capital in excess of par value 214,694 196,781 Unamortized restricted stock (10,972) (2,793) Accumulated deficit (25,261) (6,093) --------- --------- 178,977 188,403 Less: Class A treasury stock - 59 shares at cost (775) (775) --------- --------- TOTAL SHAREHOLDERS' EQUITY 178,202 187,628 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 249,591 $ 264,678 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 MARTHA STEWART LIVING OMNIMEDIA, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited, in thousands, except per share data)
Three Months Ended March 31, 2005 2004 ---------- ---------- REVENUES Publishing $ 25,355 $ 23,922 Television 797 4,177 Merchandising 9,392 10,789 Internet/Direct Commerce 3,122 5,613 ---------- ---------- TOTAL REVENUES 38,666 44,501 ---------- ---------- OPERATING COSTS AND EXPENSES Production, distribution and editorial 23,565 28,940 Selling and promotion 16,579 13,448 General and administrative 13,398 15,523 Amortization of non-cash equity compensation 3,219 1,455 Depreciation and amortization 1,687 1,674 ---------- ---------- TOTAL OPERATING COSTS AND EXPENSES 58,448 61,040 ---------- ---------- OPERATING LOSS (19,782) (16,539) Interest income, net 769 362 ---------- ---------- LOSS BEFORE INCOME TAXES (19,013) (16,177) Income tax provision (23) (3,143) ---------- ---------- LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM DISCONTINUED OPERATIONS (19,036) (19,320) Loss from discontinued operations (132) (161) ---------- ---------- NET LOSS $ (19,168) $ (19,481) ========== ========== LOSS PER SHARE - BASIC AND DILUTED Loss from continuing operations $ (0.37) $ (0.39) Loss from discontinued operations (0.00) 0.00 ---------- ---------- Net loss $ (0.38) $ (0.39) ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 50,863 49,464 ---------- ---------- Diluted 50,863 49,464 ---------- ----------
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 Three Months Ended March 31, 2005 (unaudited, in thousands)
Class A Class A Class B Retained Treasury common stock common stock Capital in Unamortized Earnings Stock --------------- ----------------- excess of Restricted (Accumulated -------------- Shares Amount Shares Amount par value Stock deficit) Shares Amount Total ------ ------ ------ ------ ---------- ----------- ------------ ------ ------ -------- Balance at January 1, 2005 21,660 $ 217 29,123 $ 291 $ 196,781 $ (2,793) $ (6,093) (59) $(775) $187,628 Net loss for the period - - - - - - (19,168) - - (19,168) Issuance of shares in conjunction with stock option exercises and restricted stock plans, net of tax withholdings 839 8 - - 16,569 (10,054) - - - 6,523 Return of restricted stock (6) - - - (177) 177 - - - - Amortization of non-cash equity compensation - - - - 1,521 1,698 - - - 3,219 ------ ------ ------- ------- ---------- ---------- ------------ ----- ----- -------- Balance at March 31, 2005 22,493 $ 225 29,123 $ 291 $ 214,694 $ (10,972) $ (25,261) (59) $(775) $178,202 ====== ====== ======= ======= ========== ========== ============ ===== ===== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 MARTHA STEWART LIVING OMNIMEDIA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
For The Three Months Ended March 31, ---------------------------------- 2005 2004 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (19,168) $ (19,481) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,687 1,674 Amortization of non-cash equity compensation 3,219 1,455 Deferred income tax expense - 3,143 Changes in operating assets and liabilities 15,112 14,448 ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 850 1,239 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (328) (298) Purchase of short-term investments (41,441) - Sales of short-term investments 14,820 - ---------- --------- NET CASH USED IN INVESTING ACTIVITIES (26,949) (298) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received from stock option exercises 6,523 194 ---------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,523 194 ---------- --------- NET INCREASE (DECREASE) IN CASH (19,576) 1,135 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 104,647 165,566 ---------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 85,071 $ 166,701 ========== =========
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, 2004. 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. 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 note 5. 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. SFAS No. 109 places more emphasis on historical information, such as the Company's cumulative operating results and its current year taxable income/loss than it places on estimates of future taxable income. Therefore, the Company has established a valuation allowance of $6,740 in the first three months of 2005, and a cumulative balance of $38,693 as of March 31, 2005. 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 currently has recorded an accrual of $601 for income tax liabilities related to ongoing federal, state, and local audits. Management believes the ultimate outcome of these audits will not have a material effect on the financial position of the Company. The Company's books reflect a receivable in the amount of $5,107, which represents refundable federal and state income taxes. 7 e. Reclassifications Certain prior year financial information has been reclassified to conform to fiscal 2005 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. No employee options were granted during the three month period ended March 31, 2005 and 2004. 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, 2005 and 2004 were as follows:
2005 2004 ---------- -------------- Net loss, as reported $ (19,168) $ (19,481) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards 335 (181) ---------- -------------- Proforma net loss (19,503) $ (19,300) ========== ============== Loss per share: Basic and diluted - as reported $ (0.38) $ (0.39) Basic and diluted - pro forma (0.38) $ (0.39)
During the three months ended March 31, 2005, the Company granted 200,000 options to a board member of the Company in connection with a consulting agreement. The aggregate value of the options at the grant date, based upon the Black-Scholes option pricing model, was $3,313 ($16.56 per option) and will be expensed over the two year vesting period. The amount recognized as expense for the three months ended March 31, 2005 for these options was $276. The following assumptions were used in valuing the options under the Black- Scholes option pricing model; risk- free interest- rate 4.7%; dividend yield- zero; expected option life- 10 years. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and 8 amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) on January 1, 2006. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. The "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. The "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is currently evaluating the methodology it will apply in the adoption of Statement 123(R). As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and Note 1f to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. 2. Inventories The components of inventories are as follows:
March 31, December 31, 2005 2004 ------------ ------------ Paper $ 3,864 $ 4,279 Product merchandise - 1,236 ------------ --------- 3,864 5,515 Less: reserve for obsolete and excess inventory - 286 ------------ --------- $ 3,864 $ 5,229 ============ =========
3. 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 reflects the potential dilution that would occur from the exercise of stock options and warrants and the vesting of restricted stock. As the Company was in a loss position, for the three months ended March 31, 2005 and 2004, the antidilutive options, warrants, and restricted stock excluded from the computation of diluted earnings per share totaled 2,429,200 and 334,100 respectively. 9 Stock options that were excluded from the calculation of diluted earnings per share as their exercise price exceeded the average share price of the common shares for the three month period ended March 31, 2005 and 2004 were 9,300 and 1,119,400 respectively. 4. Industry segments The Company is a leading creator of original "how to" content and related products for homemakers and other consumers. The Company's business segments are Publishing, Television, Merchandising and Internet/Direct Commerce. The Publishing segment primarily consists of the Company's magazine operations, and also those related to its book operations. The Television segment consists of the Company's television production operations that produce television programming that airs in syndication, on public television 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 its direct-to-consumer floral business and the website marthastewart.com. Historically, this segment included the Company's operations relating to its catalog, Martha Stewart: The Catalog For Living, which was discontinued in 2004. 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 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. OIDA is also used externally by the Company's investors, analysts, and industry peers. 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. 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, (unaudited) ---------------------- 2005 2004 ------- -------- OPERATING INCOME (LOSS) Publishing $(8,718) $ (3,848) Television (2,272) (1,947) Merchandising 5,815 6,489 Internet/Direct Commerce (1,509) (2,679) ------- -------- Operating Loss before Corporate Expenses (6,684) (1,985) Corporate Expenses (13,098) (14,554) ------- -------- TOTAL OPERATING LOSS (19,782) (16,539) ------- -------- DEPRECIATION AND AMORTIZATION Publishing 247 62 Television 46 57 Merchandising 209 190 Internet/Direct Commerce 252 243 Corporate Expenses 933 1,122 ------- -------- TOTAL DEPRECIATION AND AMORTIZATION 1,687 1,674 ------- --------
10
Three Months Ended March 31, (unaudited) ----------------------------------- 2005 2004 --------- ---------- AMORTIZATION OF NON-CASH EQUITY COMPENSATION Publishing 779 51 Television 64 - Merchandising 77 13 Internet/Direct Commerce 9 - Corporate Expenses 2,290 1,391 --------- ---------- TOTAL AMORTIZATION OF NON-CASH EQUITY COMPENSATION 3,219 1,455 --------- ---------- OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION AND AMORTIZATION OF NON-CASH EQUITY COMPENSATION Publishing (7,692) (3,735) Television (2,162) (1,890) Merchandising 6,101 6,692 Internet/Direct Commerce (1,248) (2,436) --------- ---------- Operating Loss before Depreciation and Amortization and Amortization of Non-Cash Equity Compensation and before Corporate Expenses (5,001) (1,369) Corporate Expense (9,875) (12,041) --------- ---------- TOTAL OPERATING LOSS BEFORE DEPRECIATION AND AMORTIZATION AND AMORTIZATION OF NON-CASH EQUITY COMPENSATION $ (14,876) $ (13,410) ========= ==========
5. 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 net assets of Body + Soul net assets, the Company recorded tangible assets of $612, an intangible trademark asset of $300, and assumed liabilities of $2,669 based upon receipt of an asset appraisal performed by an external valuation services firm. Goodwill of $6,613 was recognized as the excess of the purchase price over the fair value of the assets acquired. In connection with the acquisition of the net assets of Dr. Andrew Weil's Self Healing newsletter, the Company recorded tangible assets of $428, an intangible subscriber list asset of $900, an intangible trademark asset of $200 and assumed liabilities of $1,902 based upon receipt of an asset appraisal performed by an external valuation services firm. Goodwill of $2,219 was recognized as the excess of the purchase price over the fair value of the assets acquired. The intangible subscriber lists are subject to an eighteen month amortization period. For the three month period ended March 31, 2005 approximately $150 was charged to amortization expense and accumulated amortization. 11 6. Related Party Transaction Martha Stewart has submitted a claim, pursuant to the Company's By-laws, for approximately $3,700, for reimbursement of certain 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. Ms. Stewart's defense of this count was successful and a judgment of acquittal was entered in her favor. The Corporation and Ms. Stewart submitted the question of whether or not she is entitled to indemnification to an independent expert on Delaware law. On March 15, 2005 the independent expert determined that Ms. Stewart is entitled to indemnification. The Corporation believes that substantially all amounts reimbursed to Ms. Stewart will be reimbursable to the Corporation under its Directors & Officers insurance policy and, accordingly, does not believe that any payments will result in a significant expense to the Corporation. 7. 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. The loss from operations for the three months ended March 31, 2005 and 2004 was $132 and $161, respectively. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart Living Omnimedia, Inc., and its subsidiaries. EXECUTIVE SUMMARY TRENDS, RISKS AND UNCERTAINTIES Since June 2002, as a result of the negative publicity and criminal and civil proceedings surrounding Martha Stewart's sale of non-Company stock we experienced substantial negative effects on our business. However, although we cannot provide any assurances regarding future trends, based on our current view of the market, we are cautiously optimistic about the Company's prospects in 2005, including prospects for an increase in advertising pages and revenue in certain of the Company's magazines, as well as the potential benefit from the launch of a new syndicated television program in the Fall of 2005. Additionally, as part of an agreement with Mark Burnett, a well regarded producer of prime-time programming, the Company will participate in the production of a primetime network television series titled, The Apprentice: Martha Stewart. This new program will feature Martha Stewart as the host and will be broadcast by NBC. While MSO will not have a direct financial interest in the prime-time program, MSO expects to benefit from promotion of the Company's brands, products and its business. We expect that this program will expose the brand to a wider audience of viewers, consumers and business partners. Additionally, under a four year agreement, the Company expects to launch a Martha Stewart-branded satellite radio channel on SIRIUS satellite radio. In August 2004, we decided to discontinue the Catalog for Living and its online product offerings, which are included in the Internet/Direct Commerce segment. The operations of the Catalog for Living and the online component of this business were not profitable. Currently, the Internet/ Direct Commerce segment principally consist of our online flowers program, marthasflowers.com, as well as the online content portion of our business. As a result of the changes to the business, we expect to see a further reduction in revenue, operating costs and a reduced operating loss in this segment in the near term. The operations of our television segment were significantly reduced in 2004. Pending the launch of our new syndicated television program in September 2005, the segment primarily consists of a cable television distribution agreement with The Style Network, a weekly syndicated program - Petkeeping with Marc Morrone and a weekly show airing on PBS stations nationwide - Everyday Food. Previously, the segment included our nationally syndicated daily show, Martha Stewart Living, as well as several other cable television shows. The Company's current agreement with Kmart provides for certain minimum guaranteed royalty payments. We expect the minimum guarantees will exceed actual royalties earned from retail sales through 2007 primarily due to trends at Kmart, which include past store closings and lower same-store sales. 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 schedules out the future minimum guaranteed royalty payments.
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
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. 13 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 TO THREE MONTHS ENDED MARCH 31, 2004 PUBLISHING SEGMENT
2005 2004 (unaudited) (unaudited) Variance ----------- ----------- -------- PUBLISHING REVENUE Advertising $ 8,680 $ 8,135 $ 545 Circulation 16,161 15,434 727 Other 514 353 161 ----------- ----------- -------- TOTAL PUBLISHING SEGMENT REVENUE 25,355 23,922 1,433 ----------- ----------- -------- PUBLISHING OPERATING COSTS AND EXPENSES Production, distribution and editorial 16,265 15,018 (1,247) Selling and promotion 16,165 12,285 (3,880) General and administrative 617 354 (263) Amortization of non-cash equity compensation 779 51 (728) Depreciation and amortization 247 62 (185) ----------- ----------- -------- TOTAL PUBLISHING OPERATING COSTS AND EXPENSES 34,073 27,770 (6,303) ----------- ----------- -------- OPERATING LOSS $ (8,718) $ (3,848) $ (4,870) ----------- ----------- --------
Publishing revenues increased $1.4 million, or 6.0%, to $25.4 million for the three months ended March 30, 2005, from $23.9 million for the three months ended March 30, 2004. This increase was primarily due to the acquisition of the Body and Soul group (which includes both Body + Soul magazine as well as Dr. Andrew Weil's Self Healing newsletter) in August of 2004 which contributed $2.1 million to revenue in the current quarter, as well as an increase in revenue from Everyday Food of $1.0 million. The increase was partially offset by lower revenue from certain other magazines discussed more fully below. Circulation revenue increased $0.7 million primarily due to the addition of the Body and Soul group which contributed $0.9 million in the quarter and an increase in revenue from Everyday Food of $0.5 million related to an increase in the number of subscription copies served, partially offset by lower circulation revenue from our Kids: Fun Stuff To Do Together magazine of $0.5 million related to a decrease in frequency. Advertising revenue increased $0.5 million, due in part to the addition of Body & Soul, which accounted for $0.9 million of the increase, an increase in Everyday Food revenue of $0.4 million due principally to an increase in advertising rate per page. The increases were partially offset by lower advertising revenue of $0.5 million from Martha Stewart Living as a result of fewer advertising pages as well as lower revenue from the Kids: Fun Stuff To Do Together magazine principally as a result of publishing one less issue in the period.
Magazine Publication Schedule 2005 2004 - ----------------------------- ------------ ------------ Martha Stewart Living Three Issues Three Issues Everyday Food Three Issues Three Issues Special Interest Publications Two Issues Three Issues Body + Soul (a) Two Issues n/a
(a) Acquired in August 2004 and therefore was not included in prior periods. 14 Production, distribution and editorial expenses increased $1.2 million primarily reflecting the additional costs associated with the Body & Soul group and higher distribution, paper, and printing costs of Everyday Food, due primarily to an increase in circulation, partially offset by lower paper, printing and distribution costs of Kids: Fun Stuff To Do Together magazine, due to the reduced frequency. Selling and promotion expenses increased $3.9 million primarily due to costs associated with the Body & Soul group acquisition, higher circulation costs for Martha Stewart Living due to higher volume of subscription acquisition mailings, due in part to timing of mail campaigns, as well as the costs associated with employee severance. The increase was partially offset by lower circulation costs for Everyday Food as the prior year period included costs associated with the magazines rapid growth, as well as a reduction in marketing efforts for the Kids: Fun Stuff To Do Together magazine. The increase in the amortization of non-cash equity compensation includes employee severance costs, as well as costs associated with the company's annual equity grant. TELEVISION SEGMENT
2005 2004 (unaudited) (unaudited) Variance ----------- ----------- -------- TELEVISION REVENUE Syndication $ 170 $ 3,489 $ (3,319) Licensing and other 627 688 (61) ----------- ----------- -------- TOTAL TELEVISION SEGMENT REVENUE 797 4,177 (3,380) ----------- ----------- -------- TELEVISION OPERATING COSTS AND EXPENSES Production, distribution and editorial 1,269 4,603 3,334 Selling and promotion 234 569 335 General and administrative 1,456 895 (561) Amortization of non-cash equity compensation 64 - (64) Depreciation and amortization 46 57 11 ----------- ----------- -------- TOTAL TELEVISION OPERATING COSTS AND EXPENSES 3,069 6,124 3,055 ----------- ----------- -------- OPERATING LOSS $ (2,272) $ (1,947) $ (325) ----------- ----------- --------
Television revenues decreased $3.4 million, or 80.9%, to $0.8 million for the quarter ended March 31, 2005, from $4.2 million for the quarter ended March 31, 2004. The decrease was primarily due to lower revenue from our syndicated daily program which ceased airing in mid September 2004. Our revenue in the television segment will continue to be negatively impacted, until the expected launch of our new syndicated show in September of 2005. Production, distribution and editorial expenses as well as selling and promotion expenses decreased in the period due to the cessation of production of the syndicated daily show. General and administrative expense increased primarily due to higher professional fees incurred in the quarter related to future productions. 15 MERCHANDISING SEGMENT
2005 2004 (unaudited) (unaudited) Variance ----------- ----------- -------- MERCHANDISING REVENUE Kmart earned royalty $ 6,132 $ 6,486 $ (354) Kmart minimum true-up 2,078 2,412 (334) Other 1,182 1,891 (709) ----------- ----------- -------- TOTAL MERCHANDISING SEGMENT REVENUE 9,392 10,789 (1,397) ----------- ----------- -------- MERCHANDISING OPERATING COSTS AND EXPENSES Production, distribution and editorial 2,139 2,616 477 Selling and promotion (86) 108 194 General and administrative 1,238 1,373 135 Amortization of non-cash equity compensation 77 13 (64) Depreciation and amortization 209 190 (19) ----------- ----------- -------- TOTAL MERCHANDISING OPERATING COSTS AND EXPENSES 3,577 4,300 723 ----------- ----------- -------- OPERATING INCOME $ 5,815 $ 6,489 $ (674) ----------- ----------- --------
Merchandising revenues decreased $1.4 million, or 12.9%, to $9.4 million for the quarter ended March 31, 2005, from $10.8 million for the quarter ended March 31, 2004, 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 approximately 3% on February 1, 2005. Listed separately above, is the pro-rata portion of revenue related to the contractual minimum amounts covering the current period, net of amounts subject to recoupment. We expect the minimum guarantees will exceed actual royalties earned from retail sales through 2007 primarily due to store closings and lower same-store sales trends. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than prior years. Other revenue in the segment declined in the quarter principally due to a decline in royalty revenue from the Martha Stewart Everyday paint program, due to lower sales and a lower royalty rate and the absence of revenue related to our Signature flooring program which terminated in late 2004. Production, distribution and editorial expenses decreased $0.5 million in the period due to lower compensation related expense. 16 INTERNET/DIRECT COMMERCE SEGMENT
2005 2004 (unaudited) (unaudited) Variance ----------- ----------- -------- INTERNET/DIRECT COMMERCE REVENUE Product $ 2,904 $ 5,472 $ (2,568) Other 218 141 77 ----------- ----------- -------- TOTAL INTERNET/DIRECT COMMERCE SEGMENT REVENUE 3,122 5,613 (2,491) ----------- ----------- -------- INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES Production, distribution and editorial 3,799 6,611 2,812 Selling and promotion 244 460 216 General and administrative 327 978 651 Amortization of non-cash equity compensation 9 - (9) Depreciation and amortization 252 243 (9) ----------- ----------- -------- TOTAL INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES 4,631 8,292 3,661 ----------- ----------- -------- OPERATING LOSS $ (1,509) $ (2,679) $ 1,170 ----------- ----------- --------
Internet/Direct Commerce revenues decreased $2.5 million, to $3.1 million for the three months ended March 31, 2005, from $5.6 million for the three months ended March 31, 2004. 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 sales related to our catalog offerings was largely attributable to the discontinuance of the Catalog for Living. As a result of this action, we expect to see a continued reduction in revenue, operating costs and a reduced operating loss in this segment in 2005. Production, distribution and editorial costs decreased $2.8 million due to lower product sales, which resulted in lower cost of goods sold as well as lower fulfillment expenses. Catalog production and distribution costs also decreased in the quarter as we discontinued mailing the catalog. The segment also benefited from lower staffing levels. General and administrative expenses decreased $0.7 million due to lower facility related costs. CORPORATE
2005 2004 (unaudited) (unaudited) Variance ----------- ----------- -------- CORPORATE OPERATING COSTS AND EXPENSES Production, distribution and editorial $ 93 $ 92 $ (1) Selling and promotion 22 26 4 General and administrative 9,760 11,923 2,163 Amortization of non-cash equity compensation 2,290 1,391 (899) Depreciation and amortization 933 1,122 189 ----------- ----------- -------- TOTAL CORPORATE OPERATING COSTS AND EXPENSES 13,098 14,554 1,456 ----------- ----------- -------- OPERATING LOSS $ (13,098) $ (14,554) $ 1,456 ----------- ----------- --------
Corporate operating costs and expenses decreased $1.5 million, or 10.0%, to $13.1 million for the three months ended March 31, 2005, from $14.6 million for the three months ended March 31, 2004. General and administrative 17 expenses decreased $2.2 million principally resulting from lower professional fees due to revised estimates regarding the recoverability of certain legal fees, as well as the expiration of certain employee retention programs and lower location fees. The decrease was partially offset by higher facility related costs, as facility related costs previously allocated to the Internet/Direct Commerce segment are now included in this segment. The increase in the amortization of non-cash compensation expense is principally related to costs associated with certain employee and director equity grants. OTHER ITEMS Income tax provision for the quarter ended March 31, 2005 was nominal, compared to an income tax provision of $3.1 million for the quarter ended March 31, 2004. The current period provision includes a valuation allowance of $6.7 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. The prior year amount included a valuation allowance of $9.3 million. Net Loss. Net loss was $19.2 million for the quarter ended March 30, 2005, compared to a net loss of $19.5 million for the quarter ended March 30, 2004, as a result of the above mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $85.1 million and $104.6 million and short-term investments were $61.9 million and $35.3 million at March 30, 2005 and December 31, 2004, respectively. Cash flows provided by operating activities were $0.9 million and $1.2 million during the three months ended March 31, 2005 and 2004, respectively. Cash provided by operating activities during the three months ended March 31, 2005 were primarily due to changes in operating assets and liabilities of $15.1 million, the amortization of non-cash equity compensation of $3.2 million and depreciation and amortization of $1.7 million, partially offset by a net loss for the period of $19.2 million. The changes in operating assets and liabilities reflect a decrease in accounts receivable due principally to the collection of a receivable from Kmart, partially offset by a decrease in certain accounts payable. Cash 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 of $3.1 million, and by depreciation and amortization of $1.7 million as well as the amortization of non-cash equity compensation of $1.5 million, partially offset by a net loss for the period of $19.5 million. Cash flows used in investing activities were $27.0 million and $0.3 million during the three months ended March 31, 2005 and 2004, respectively. Cash flows used in investing activities in 2005 resulted from the net purchase of short-term investments of $26.6 million and capital expenditures $0.3 million. Cash flows used in investing activities in 2004 resulted from capital expenditures. Cash flows provided by financing activities for the three month periods ended March 31, 2005 and 2004 were $6.5 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 used as security for outstanding letters of credit. As of March 31, 2005, we had no outstanding borrowings under this facility. 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, although due to the changes in the business we now expect revenue to be tied to certain key holidays. 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 recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties 18 paid on actual sales in the fourth quarter of each year, 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 US generally accepted accounting principles. 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 partners and payment is generally made by our partners on a quarterly basis. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined. Certain other of our other merchandising agreements also contain minimum guarantee provisions. These minimum guarantees will be recorded when such amounts are both determinable and deemed collectible. Intangible assets A substantial portion of the Company's intangible assets is goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. All of the Company's goodwill is attributable to certain magazines in its publishing segment. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Our impairment review process compares the fair value of the reporting unit (magazines) in which the goodwill resides to its carrying value. In 2004, the Company engaged an external valuation services firm to report on the fair value of the Company's goodwill. In 2003, the Company estimated future cash flows based upon individual magazine historical results, current trends and operating cash flows to access the fair value. No impairment charges were recorded in 2004 and 2003. 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. 19 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, 2005. 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, and certain other officers and directors of the Company as defendants: 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. 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. 20 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibits are filed as part of this report:
Exhibit Number Exhibit Title - -------- ------------- 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
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: May 10, 2005 /s/ James Follo ------------------------------- Name: James Follo Title: Executive Vice President, Chief Financial and Administrative Officer 22 EX-31.1 2 y08854exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Susan Lyne, certify that: 1. I have reviewed this Quarterly Report of Martha Stewart Living Omnimedia, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (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: May 10, 2005 /s/ Susan Lyne ------------------------------------------ Susan Lyne President & Chief Executive Officer EX-31.2 3 y08854exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, James Follo, certify that: 1. I have reviewed this Quarterly Report of Martha Stewart Living Omnimedia, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (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: May 10, 2005 /s/ James Follo --------------------------------------------- James Follo Chief Financial and Administrative Officer EX-32 4 y08854exv32.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 for the quarter ended March 31, 2005 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 10, 2005 /s/ Susan Lyne ------------------------------ Susan Lyne President & Chief Executive Officer Dated: May 10, 2005 /s/ James Follo ------------------------------ James Follo Chief Financial and Administrative Officer -----END PRIVACY-ENHANCED MESSAGE-----