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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2002
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 (IRS Employer
incorporation or organization) Identification No.)
11 West 42nd Street 10036
New York, NY (Zip Code)
(Address of principal executive offices)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class November 11, 2002
Class A, $0.01 par value 19,021,441
Class B, $0.01 par value 30,145,328
------------------
Total 49,166,769
==================
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 11
Item 4. Controls and Procedures 18
Part II. Other Information
Item 1. Litigation 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 21
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 December
30, 2002 31, 2001
--------- ---------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 170,693 $ 141,162
Accounts receivable, net 36,908 45,629
Inventories 12,118 12,952
Deferred television production costs 4,350 3,627
Other current assets 8,016 7,772
--------- ---------
Total current assets 232,085 211,142
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 39,282 45,423
--------- ---------
INTANGIBLE ASSETS, net 44,257 49,340
--------- ---------
OTHER ASSETS 7,016 5,716
--------- ---------
Total assets $ 322,640 $ 311,621
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 39,066 $ 40,649
Accrued payroll and related costs 8,816 5,988
Current portion of deferred subscription income 26,296 28,724
--------- ---------
Total current liabilities 74,178 75,361
--------- ---------
DEFERRED SUBSCRIPTION INCOME 8,304 9,071
--------- ---------
OTHER NONCURRENT LIABILITIES 4,655 4,997
--------- ---------
Total liabilities 87,137 89,429
--------- ---------
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares
authorized; 19,140 and 15,160 shares issued in 2002
and 2001, respectively 192 152
Class B common stock, $.01 par value, 150,000 shares
authorized; 30,295 and 33,619 shares outstanding in 2002
and 2001, respectively 303 336
Capital in excess of par value 177,504 173,470
Retained earnings 58,279 49,009
--------- ---------
236,278 222,967
Less: Class A treasury stock-at cost (775) (775)
--------- ---------
Total shareholders' equity 235,503 222,192
--------- ---------
Total liabilities and shareholders' equity $ 322,640 $ 311,621
========= =========
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,
-------------------- ----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Revenues
Publishing $ 46,515 $ 44,015 $ 136,932 $ 131,646
Television 6,362 6,627 20,323 19,970
Merchandising 10,060 8,289 37,110 24,913
Internet/Direct Commerce 7,994 9,109 23,127 29,390
-------- -------- --------- ---------
Total revenues 70,931 68,040 217,492 205,919
-------- -------- --------- ---------
Operating costs and expenses
Production, distribution and editorial 39,213 35,630 115,364 107,086
Selling and promotion 10,713 10,577 33,052 31,405
General and administrative 13,689 10,627 36,715 32,189
Depreciation and amortization 2,841 2,249 8,976 6,594
Amortization of intangible assets -- 738 -- 2,213
-------- -------- --------- ---------
Total operating costs and expenses 66,456 59,821 194,107 179,487
-------- -------- --------- ---------
Income from operations 4,475 8,219 23,385 26,432
Interest income, net 545 866 1,603 3,258
-------- -------- --------- ---------
Income before income taxes 5,020 9,085 24,988 29,690
Income tax provision (2,058) (3,815) (10,245) (12,470)
-------- -------- --------- ---------
Income from continuing operations
before cumulative effect of accounting
change 2,962 5,270 14,743 17,220
Loss from discontinued operations, net of
income taxes (197) (501) (2,336) (1,044)
-------- -------- --------- ---------
Income before cumulative effect of
accounting change, net of tax 2,765 4,769 12,407 16,176
Cumulative effect of accounting change, net
of income taxes -- -- (3,137) --
-------- -------- --------- ---------
Net income $ 2,765 $ 4,769 $ 9,270 $ 16,176
======== ======== ========= =========
4
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,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Earnings per share - basic
Earnings per share from continuing
operations before cumulative effect of
accounting change $ 0.06 $ 0.11 $ 0.30 $ 0.35
---------- ---------- ---------- ----------
Loss from discontinued operations (0.00) (0.01) (0.05) (0.02)
---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change, net of tax 0.06 0.10 0.25 0.33
---------- ---------- ---------- ----------
Cumulative effect of accounting change -- -- (0.06) --
---------- ---------- ---------- ----------
Earnings per share - basic $ 0.06 $ 0.10 $ 0.19 $ 0.33
========== ========== ========== ==========
Weighted average shares outstanding 49,209 48,727 49,050 48,617
Earnings per share - diluted
Earnings per share from continuing
operations before cumulative effect of
accounting change $ 0.06 $ 0.11 $ 0.30 $ 0.35
---------- ---------- ---------- ----------
Loss from discounted operations (0.00) (0.01) (0.05) (0.02)
---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change, net of tax 0.06 0.10 0.25 0.33
---------- ---------- ---------- ----------
Cumulative effect of accounting change -- -- (0.06) --
---------- ---------- ---------- ----------
Earnings per share - diluted $ 0.06 $ 0.10 $ 0.19 $ 0.33
========== ========== ========== ==========
Weighted average common shares
outstanding 49,316 49,022 49,205 49,093
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Martha Stewart Living Omnimedia, Inc.
Consolidated Statement of Shareholders' Equity
For the Nine Months Ended September 30, 2002
(unaudited, in thousands)
Capital
Class A Class B in Excess Class A
common stock common stock of par Retained treasury stock
Shares Amount Shares Amount value earnings Shares Amount Total
------ ------ ------ ------ ----- -------- ------ ------ -----
Balance at January 1, 2002 15,160 $152 33,619 $ 336 $173,470 $49,009 (59) ($775) $222,192
Net income for the period -- -- -- -- -- 9,270 -- -- 9,270
Conversion of shares 3,324 33 (3,324) (33) -- -- -- -- --
Issuance of shares for stock option
Exercises 656 7 -- -- 4,034 -- -- -- 4,041
------ ---- ------- ----- -------- ------- --- ----- --------
Balance of September 30, 2002 19,140 $192 30,295 $ 303 $177,504 $58,279 (59) ($775) $235,503
====== ==== ======= ===== ======== ======= === ===== ========
The accompanying notes are an integral part of this condensed consolidated
financial statements.
6
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended
September 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities
Net income $ 9,270 $ 16,176
Adjustments to reconcile net income to net
cash provided by operating activities
Cumulative effect of accounting change 3,137 --
Non cash loss from discontinued operations 721 --
Depreciation and amortization 8,976 8,980
Changes in operating assets and liabilities 6,838 (17,619)
--------- ---------
Net cash provided by operating activities 28,942 7,537
--------- ---------
Cash flows used in investing activities
Equity investment, net -- 13,096
Acquisition of business -- (3,892)
Capital expenditures (3,452) (14,827)
--------- ---------
Net cash used in investing activities (3,452) (5,623)
--------- ---------
Cash flows from financing activities
Proceeds received from stock option exercises 4,041 2,913
Repurchase of common stock -- (595)
--------- ---------
Net cash provided by financing activities 4,041 2,318
--------- ---------
Net increase in cash 29,531 4,232
Cash and cash equivalents, beginning of period 141,162 127,425
--------- ---------
Cash and cash equivalents, end of period $ 170,693 $ 131,657
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except
per share data)
1. Accounting policies
a. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is
herein referred to as the "Company."
The information included in the foregoing interim condensed consolidated
financial statements is unaudited. In the opinion of management, all
adjustments which are of a normal recurring nature and necessary for a
fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be
expected for the entire year. These condensed consolidated financial
statements are unaudited and should be read in conjunction with the
audited financial statements included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission with respect
to its fiscal year ended December 31, 2001.
b. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Management does not expect such differences to have a material effect on
the Company's consolidated financial statements.
c. Income taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and liability method of
SFAS 109, deferred assets and liabilities are recognized for the future
costs and benefits attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
d. Reclassifications
The prior period presentation has been restated to conform with Emerging
Issues Task Force Issue 01-09, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products." These rules
require that certain expenditures of the Publishing segment related to
newsstand product placement historically presented as expenses be
reclassified and netted against revenue. In addition, the prior year
periods have been restated to reflect as discontinued operations the
results of the operations discussed in Note 5.
e. New Accounting pronouncements
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 an annual assessment for impairment by applying a fair-value based
test. The company will perform its annual impairment review during the
fourth quarter of each year, commencing in the fourth quarter of 2002.
8
The Company completed the initial impairment tests in the second quarter
of 2002 which resulted in a charge of $5,039 ($3,137 net of income taxes)
to reduce the carrying value of its goodwill related to the
Internet/Direct Commerce segment. The remaining intangible assets
represent goodwill of the Publishing segment and its fair value exceeds
the carrying value.
The provisions of SFAS 142 are effective for periods after adoption and
retroactive application is not permitted. Therefore, the historical
results of periods prior to 2002 do not reflect the effect of SFAS 142.
The following comparative information represents pro forma results
assuming the adoption of SFAS 142 as of January 1, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income as reported $ 2,765 $ 4,769 $ 9,270 $ 16,176
Goodwill amortization -- 738 -- 2,213
---------- ---------- ---------- ----------
Adjusted Net Income $ 2,765 $ 5,507 $ 9,270 $ 18,389
========== ========== ========== ==========
Basic per share information:
Net income as reported $ 0.06 $ 0.10 $ 0.19 $ 0.33
Goodwill amortization -- 0.01 -- 0.05
---------- ---------- ---------- ----------
Adjusted Net Income $ 0.06 $ 0.11 $ 0.19 $ 0.38
========== ========== ========== ==========
Diluted per share information:
Net income as reported $ 0.06 $ 0.10 $ 0.19 $ 0.33
Goodwill amortization -- 0.01 -- 0.04
---------- ---------- ---------- ----------
Adjusted Net Income $ 0.06 $ 0.11 $ 0.19 $ 0.37
========== ========== ========== ==========
2. Inventories
The components of inventories are as follows:
September December
30, 2002 31, 2001
--------- --------
Paper $ 4,604 $ 4,526
Product merchandise $ 7,514 $ 8,426
------- -------
$12,118 $12,952
======= =======
3. Earnings per share
Earnings per share are computed in accordance with SFAS No. 128, "Earnings
Per Share". Basic earnings per share are calculated by dividing net income
by the weighted-average number of common shares outstanding during each
period. Diluted earnings per share include the determinants of basic
earnings per share and, in addition, give effect to potentially dilutive
common shares.
4. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business
segments are Publishing, Television, Merchandising and Internet/Direct
Commerce. The Publishing segment primarily consists of the Company's
magazine
9
operations, and also those related to its book, radio, newspaper and music
operations. The Television segment consists of the Company's television
production operations that produce television programming that airs in
syndication in the United States and on cable in the United States, Canada
and certain other international markets. The Merchandising segment
consists of the Company's operations related to the design of merchandise
and related promotional and packaging materials that are distributed by
its retail and manufacturing partners in exchange for royalty income. The
Internet/Direct Commerce segment comprises the Company's operations
relating to its catalog, Martha Stewart: The Catalog For Living, and the
website marthastewart.com.
Revenues for each segment are presented in the condensed consolidated
income statements. Income (loss) from operations for each segment were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Publishing $ 15,295 $ 15,741 $ 47,038 $ 48,362
Television 1,117 700 2,409 1,887
Merchandising 6,037 6,539 25,826 22,566
Internet/Direct Commerce (7,083) (5,535) (22,756) (17,459)
-------- -------- -------- --------
Total before corporate charges 15,366 17,445 52,517 55,356
Corporate charges (10,891) (9,226) (29,132) (28,924)
-------- -------- -------- --------
Income from continuing operations $ 4,475 $ 8,219 $ 23,385 $ 26,432
======== ======== ======== ========
5. Discontinued Operations
As of June 30, 2002 the company has decided to exit The Wedding List
business which is a component of the Internet/Direct Commerce segment. The
loss from exiting these operations resulted in a write-down of fixed
assets of approximately $500 and the accrual of future lease commitments,
net of anticipated sublease rental income of $4,900, of approximately
$700. These lease payments and offsetting receipts are payable through
September 2015. The total charge of $1,222, or $751 net of tax benefit,
has been included with the losses from operations during the current year
periods and is reflected as a loss from discontinued operations in the
income statements. Total revenue for the nine months ended September 30,
2002 was $1,978 compared to revenue of $1,855 in the prior year period.
The pre-tax loss for the nine months ended September 30, 2002 was $2,736,
excluding the above charge of $1,222, compared to $1,801 in the prior year
period
6. Supplemental cash flow information
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ -------
Cash paid for interest $ 41 $ 94 $ 140 $ 325
Cash paid for income taxes $385 $1,823 $4,614 $12,222
10
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, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Three Months Ended
September 30,
-----------------------
2002 2001
-------- --------
(in thousands, except
per share amounts)
Revenues
Publishing $ 46,515 $ 44,015
Television 6,362 6,627
Merchandising 10,060 8,289
Internet/Direct Commerce 7,994 9,109
-------- --------
70,931 68,040
-------- --------
Operating costs and expenses
Production, distribution and editorial 39,213 35,630
Selling and promotion 10,713 10,577
General and administrative 13,689 10,627
Depreciation and amortization 2,841 2,249
Amortization of intangible assets -- 738
-------- --------
Total operating costs and expenses 66,456 59,821
-------- --------
Income from continuing operations 4,475 8,219
Interest income, net 545 866
-------- --------
Income before income taxes 5,020 9,085
Income tax provision (2,058) (3,815)
-------- --------
Net income from continuing operations $ 2,962 $ 5,270
======== ========
Loss from discontinued operations (197) (501)
======== ========
Net Income $ 2,765 $ 4,769
======== ========
Revenues. Total revenues increased $2.9 million, or 4.2%, to $70.9 million for
the three months ended September 30, 2002, from $68.0 million for the three
months ended September 30, 2001. Publishing revenues increased $2.5 million, or
5.7%, to $46.5 million for the three months ended September 30, 2002, from $44.0
million for the three months ended September 30, 2001. This increase was
primarily due to an increase in advertising pages sold in Martha Stewart Living
magazine of $1.9 million and increased circulation revenue of $0.5 million.
During the current period we published two issues compared to one special issue
in the prior year's quarter, but realized little incremental advertising
revenues. Television revenues decreased $0.3 million, or 4.0%, to $6.4 million
for the three months ended September 30, 2002, from $6.6 million for the three
months ended September 30, 2001. The decrease is due primarily to lower
syndication advertising revenues of $0.8 million from the Martha Stewart Living
program due to lower advertising rates and ratings. This decrease was partially
offset by increased revenue of $0.6 million from our cable programs.
Merchandising revenues increased $1.8 million, or 21.4%, to $10.1 million for
the three months ended September 30, 2002, from $8.3 million for the three
months ended September 30, 2001. The increase resulted primarily from higher
royalty revenues of $1.2 million from our Kmart agreement. The royalty rate
under our agreement with Kmart increased on August 1, 2001 and again on February
1, 2002. Because of a change, effective August 1, 2001, in the manner in which
our royalty is calculated, from product cost basis to retail sales basis,
precise quantification of the impact of the increased royalty
11
rate is not practicable. Kmart is currently operating under Chapter 11 of the
Federal Bankruptcy Code. During the year they have closed 283 stores. The
revenues we receive from Kmart are based upon retail sales of our products. As a
result of Kmart store closings and recent Kmart sales trends we currently expect
our royalties earned under our agreement with Kmart to be at approximately the
minimum contractual amount for the full year 2002. Revenues from our Martha
Stewart Signature products increased approximately $0.5 million for the three
months ended September 30, 2002. Internet/Direct Commerce revenues decreased
$1.1 million, or 12.2%, to $8.0 million for the three months ended September 30,
2002, from $9.1 million for the three months ended September 30, 2001, due to
lower product sales of $0.8 million and lower advertising revenues of $0.3
million. The reduced product sales resulted principally from lower catalog
circulation.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $3.6 million, or 10.1%, to $39.2 million for the three months
ended September 30, 2002, from $35.6 million for the three months ended
September 30, 2001. Publishing segment costs increased $2.6 million primarily
reflecting increased paper and printing costs of $1.2 million associated with
increased pages in Martha Stewart Living magazine and the printing of one more
special publication than in the prior year, increased compensation costs of
approximately $1.0 million, increased distribution costs of $0.5 million due to
increased postal rates and a larger book size, and costs of approximately $0.2
million attributable to the future test of a new Everyday Food magazine,
partially offset by miscellaneous cost savings. Merchandising costs increased
$2.1 million due primarily to the elimination of certain design cost
reimbursements from Kmart Corporation as part of our new agreement which
commenced in August 2001, as well as to costs related to the development and
launches of our Martha Stewart Signature lines. Television costs decreased $1.0
million, primarily as a result of lower production costs recognized in the
period, due to the amortization effect of signing a new cable licensing
arrangement.
Selling and promotion. Selling and promotion expenses increased $0.1 million, or
1.3%, to $10.7 million for the three months ended September 30, 2002, from $10.6
million for the three months ended September 30, 2001.
General and administrative. General and administrative expenses increased $3.1
million, or 28.8%, to $13.7 million for the three months ended September 30,
2002, from $10.6 million for the three months ended September 30, 2001. Higher
expenses of $2.0 million resulted primarily from legal, corporate communications
and other expenses resulting from corporate matters associated with various
investigations related to personal matters of the Company's Chairman and Chief
Executive Officer, and increased payroll costs of $0.9 million.
Depreciation and amortization. Depreciation and amortization increased $0.6
million, or 26.3%, to $2.8 million for the three months ended September 30,
2002, from $2.2 million for the three months ended September 30, 2001. The
increase is primarily due to increased depreciation of our new website which we
launched in November 2001.
Amortization of 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 an annual assessment for impairment by applying a fair-value based
test. Accordingly, there is no expense in the current period for the
amortization of goodwill. If this standard had been in effect for the prior
year's period, amortization expense would have been $0.7 million lower (an
impact of $.01 on an earnings per share basis.)
Interest income, net. Interest income, net was $0.5 million for the three months
ended September 30, 2002, compared to $0.9 million for the three months ended
September 30, 2001, due to significantly lower interest rates, slightly offset
by interest earned on higher average cash balances during the current year.
Income tax provision. Income tax provision for the three months ended June 30,
2002 was $2.1 million, representing a 41% effective income tax rate. Income tax
provision for the three months ended September 30, 2001 was $3.8 million,
representing a 42% effective income tax rate. The lower rate in 2002 is due
primarily to the effect of reduced non-deductible amortization of intangible
assets offset by reduced tax
12
benefits from tax-free interest income.
Loss from discontinued operations. Loss from discontinued operations was $0.2
million for the three months ended September 30, 2002, compared to $0.5 million
from the same operations for the three months ended September 30, 2001,
representing lower operating losses from The Wedding List during the period.
Net income. Net income was $2.8 million for the three months ended September 30,
2002, compared to net income of $4.8 million for three months ended September
30, 2001, as a result of the above mentioned factors.
13
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Nine Months Ended
September 30,
------------------------
2002 2001
--------- ---------
(in thousands, except
per share amounts)
Revenues
Publishing $ 136,932 $ 131,646
Television 20,323 19,970
Merchandising 37,110 24,913
Internet/Direct Commerce 23,127 29,390
--------- ---------
Total revenues 217,492 205,919
--------- ---------
Operating costs and expenses
Production, distribution and editorial 115,364 107,086
Selling and promotion 33,052 31,405
General and administrative 36,715 32,189
Depreciation and amortization 8,976 6,594
Amortization of intangible assets 2,213
--------- ---------
Total operating costs and expenses 194,107 179,487
Income from continuing operations 23,385 26,432
Interest income , net 1,603 3,258
--------- ---------
Income before income taxes 24,988 29,690
Income tax provision (10,245) (12,470)
--------- ---------
Income from continuing operations before cumulative $ 14,743 $ 17,220
effect of accounting change
Loss from discontinued operations cumulative effect
of accounting change (2,336) (1,044)
Cumulative effect of accounting change (3,137) --
--------- ---------
Net Income $ 9,270 $ 16,176
========= =========
Revenues. Total revenues increased $11.6 million, or 5.6%, to $217.5 million for
the nine months ended September 30, 2002, from $205.9 million for the nine
months ended September 30, 2001. Publishing revenues increased $5.3 million, or
4.0%, to $136.9 million for the nine months ended September 30, 2002, from
$131.6 million for the nine months ended September 30, 2001. This increase was
primarily due to an increase in advertising revenues as a result of an increase
in advertising rates and advertising pages sold in Martha Stewart Living of $6.5
million and increased revenues from Martha Stewart Weddings of $0.9 million,
partially offset by reduced advertising revenues of $2.2 million from special
publications. Television revenues increased $0.4 million, or 1.8%, to $20.3
million for the nine months ended September 30, 2002, from $20.0 million for the
nine months ended September 30, 2001. This increase was primarily due to
increased revenue from our cable programs of $1.9 million, and increased
licensing fees from the syndicated program of $0.6 million, partially offset by
lower syndication advertising revenue of $2.3 million due primarily to lower
advertising rates and lower ratings. Merchandising revenues increased $12.2
million, or 49.0%, to $37.1 million for the nine months ended September 30,
2002, from $24.9 million for the nine months ended September 30, 2001, primarily
as a result of an increased royalties of $11.7 million due primarily to a higher
royalty rate under our agreement with Kmart. The royalty rate under our
agreement with Kmart increased on August 1, 2001, and again on February 1, 2002.
Because of a change in the manner in which our royalty is calculated from the
prior period, from product cost basis to retail sales basis, precise
quantification of the impact of the increased royalty rate is not practicable.
Kmart is currently operating under Chapter 11 of the Federal Bankruptcy Code.
During the year they have closed 283 stores. The revenues we receive from Kmart
are based upon retail sales of our products. As a result of Kmart store closings
and recent sales trends at Kmart, we currently expect our royalties earned under
our agreement with Kmart to be at approximately the minimum contractual amount
for the full year 2002. Revenues from our Martha Stewart Signature products
increased approximately $0.6
14
million during the nine months ended September 30, 2002. Internet/Direct
Commerce revenues decreased $6.3 million, or 21.3%, to $23.1 million for the
nine months ended September 30, 2002, from $29.4 million for the nine months
ended September 30, 2001, due to lower product sales of $5.5 million and lower
advertising revenues of $0.8 million. The reduced product sales resulted
principally from lower catalog circulation.
Production, distribution and editorial. Production, distribution and editorial
expenses increased $8.3 million, or 7.7%, to $115.4 million for the nine months
ended September 30, 2002, from $107.1 million for the nine months ended
September 30, 2001. Publishing segment costs increased $3.3 million reflecting
increased printing costs of $1.1 million primarily associated with increased
pages in the Martha Stewart Living magazine, increased distribution costs of
$1.4 million due to increased postal rates and higher pages per issue and
increased compensation costs of $1.7 million, partially offset by lower paper
costs which resulted in savings of $0.8 million. Merchandising costs increased
$7.4 million due primarily to the elimination of certain design cost
reimbursements from Kmart Corporation as part of our new agreement which
commenced in August 2001, as well as to costs related to the development and
launches of our Martha Stewart Signature lines. Internet/Direct Commerce costs
decreased $1.6 million due primarily to reduced costs related to lower catalog
circulation, partially offset by higher compensation costs. Television
production costs decreased $0.8 million primarily as a result of lower
production costs recognized in the period, due to the amortization effect of
signing a new cable licensing arrangement .
Selling and promotion. Selling and promotion expenses increased $1.6 million, or
5.2%, to $33.1 million for the nine months ended September 30, 2002 from $31.4
million for the nine months ended September 30, 2001. Publishing segment costs
increased $3.1 million resulting principally from higher circulation costs of
$1.8 million and increased compensation costs of approximately $1.0 million.
Internet/Direct Commerce segment costs decreased $1.8 million resulting
principally from reduced advertising and promotion expenses.
General and administrative. General and administrative expenses increased $4.5
million, or 14.1%, to $36.7 million for the nine months ended September 30,
2002, from $32.2 million for the nine months ended September 30, 2001. The
higher expenses have been incurred as a result of the nature of the revised
Kmart agreement of $1.5 million, in which certain of our costs are no longer
reimbursed, and from other expenses of $2.0 million resulting from legal,
corporate communications and other expenses from corporate matters associated
with various investigations related to personal matters of the Company's
Chairman and Chief Executive Officer.
Depreciation and amortization. Depreciation and amortization increased $2.4
million, or 36.1%, to $9.0 million for the nine months ended September 30, 2002,
from $6.6 million for the nine months ended September 30, 2001. The increase is
primarily due to increased depreciation of our new website which we launched in
November 2001.
Amortization of 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 an annual assessment for impairment by applying a fair-value based
test. Accordingly, there is no expense in the current period for the
amortization of goodwill. If this standard had been in effect for the prior
year's period, amortization expense would have been $2.2 million lower (an
impact of $0.04 on a diluted earnings per share basis).
Interest income, net. Interest income, net was $1.6 million for the nine months
ended September 30, 2002, compared to $3.3 million for the nine months ended
September 30, 2001, due to significantly lower interest rates slightly offset by
interest earned on higher average cash balances during the current year.
Income tax provision. Income tax provision for the nine months ended September
30, 2002 was $10.2 million, representing a 41% effective income tax rate. Income
tax provision for the nine months ended September 30, 2002 was $12.5 million,
representing a 42% effective income tax rate. The lower rate in 2002 is due
primarily to the effect of reduced non-deductible amortization of intangibles
offset by reduced tax benefits from tax-free interest income.
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Loss from Discontinued Operations. Loss from discontinued operations was $2.3
million for the nine months ended September 30, 2002, compared to $1.0 million
from the same operations for the nine months ended September 30, 2001. The 2002
amount reflects the write-offs of fixed assets of $0.5 million, the accrual of
future net lease costs of $0.7 million and losses from operations of $2.7
million offset by tax benefits of $1.6 million.
Cumulative Effect of Accounting Change. Effective 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 an annual assessment for impairment by applying a fair-value based
test. The company will be performing its annual impairment review during the
fourth quarter of each year commencing in the fourth quarter of 2002. The
Company completed the initial impairment tests in the second quarter of 2002
which resulted in a charge of approximately $5 million ($3.1 million after
taxes) to reduce the carrying value of its goodwill related to the
Internet/Direct Commerce segment. The remaining intangible assets represent
goodwill of the Publishing segment and its fair value exceeds the carrying
value. The Company does not expect to incur any additional charges when it
performs the fourth quarter evaluation.
Net income. Net income was $9.3 million for the nine months ended September 30,
2002, compared to net income of $16.2 million for the nine months ended
September 30, 2001, as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $28.9 million during the nine months
ended September 30, 2002, compared to $7.5 million during the nine months ended
September 30, 2001. Changes in operating assets and liabilities during the nine
months ended September 30, 2002 were most significantly impacted by reduced
accounts receivable balances in the period and were reflective of the timing of
revenues. In the prior year period, changes in operating assets and liabilities
were impacted by payments for accounts payable and accrued liabilities as a
result of timing of payments for our new office facility, our internet
technology upgrade project and payments to vendors.
Cash flows used in investing activities were $3.5 million for the nine months
ended September 30, 2002, reflecting capital expenditures. Cash flows used in
investing activities were $5.6 million during the nine months ended September
30, 2001, reflecting capital expenditures of $14.8 million primarily for our
internet technology upgrade project, $3.9 million used to acquire The Wedding
List, offset by net investment proceeds of $13.1 million received primarily from
the sale of our equity investment in BlueLight.com. We currently expect capital
expenditures in 2002 and 2003 to be less than $5.0 million annually.
Cash flows provided from financing activities for the nine months ended
September 30, 2002 and 2001 were $4.0 and $2.3 million, respectively,
representing proceeds received from the exercise of employee stock options,
partially offset by purchases under a stock repurchase program
We have a line of credit with Bank of America in the amount of $10.0 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of September 30, 2002, we had no outstanding borrowings
under this facility.
We believe that our available cash balances, together with any cash generated
from operations and any funds available under existing credit facilities, will
be sufficient to meet our operating and recurring cash needs for foreseeable
periods.
SEASONALITY AND QUARTERLY FLUCTUATIONS
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Our businesses can experience fluctuations in quarterly performance. Revenue and
income from operations in our Publishing segment can vary due to the timing of
publication of magazines. Revenue and income from operations for the Television
segment may vary from quarter to quarter due to periodic broadcasts of
prime-time specials. Internet/Direct Commerce revenues also tend to be higher in
the fourth quarter due to increased consumer spending during that period.
Revenues from the Merchandising segment can vary from quarter to quarter due to
new product launches and the seasonality of certain product lines.
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.
Bad Debt
We maintain allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Receivables for royalties in our merchandising business are accrued on a monthly
basis and payment is made by our strategic partners on a quarterly basis. With
respect to Kmart, we continue to expect to be paid on a quarterly schedule and
have made no provision for any deviation as a result of Kmart's bankruptcy
proceedings.
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.
For example, the Company invested a total amount of approximately $16.3 million
in the development of its website in 2001 and 2002. The carrying value of this
asset at September 30, 2002, is approximately $13.5 million, net of accumulated
depreciation and amortization. The recovery of this asset will in part be
dependent on the success of our Internet/Direct Commerce segment.
TRENDS AND UNCERTAINTIES
The United States Attorney's office and the Securities and Exchange Commission
are investigating the personal sale of shares owned in another company, ImClone
Systems, by Martha Stewart, our Chairman and Chief Executive Officer, and
certain related matters. We have seen, and expect to continue to see, some
negative impact on the Company's business as a result of the inquiry involving
Ms. Stewart, our founder and a central figure in our business, as well as the
uncertainty surrounding these ongoing investigations and associated negative
publicity. Although it is difficult to determine with any precision the extent
to which the negative publicity and uncertainty relating to these investigations
are impacting our business, we
17
believe that, to date, they have contributed to the following trends and
uncertainties: a more challenging environment for the distribution of our Martha
Stewart Living television program for the season beginning in September 2003; a
softening in the circulation results of our magazines; some impact on
advertising revenues and a general uncertainty in our advertising sales
prospects; a softness in response rates in our direct commerce businesses;
slower than expected distribution of our new Martha Stewart Signature furniture
and floorcovering lines; and a slowdown in new business development and new
partner initiatives. In addition, the Company is incurring additional expenses,
principally relating to corporate communications and corporate professional fees
associated with the ongoing investigations. We cannot currently predict with any
certainty the extent of the impact these investigations will continue to have on
our business due to the uncertainty of the timing and nature of their
resolution.
Additionally, our Merchandising segment is highly dependent on Kmart
Corporation, which is currently involved in a reorganization proceeding under
Chapter 11 of the United States Bankruptcy Code. To the extent that Kmart is
unable to emerge from bankruptcy, we would need to secure alternative domestic
distribution for our Martha Stewart Everyday product lines. If such distribution
of our products were not secured on comparable terms it would have a material
adverse effect on our results of operations.
In the third quarter of 2002, we accrued bonuses across our business to one
hundred percent of bonus targets. In the third and fourth quarter of 2001 we
accrued to, and ultimately paid, a substantially lower percentage of target
bonuses. The aggregate incremental accrual in third quarter was approximately
$1.7 million and is represented in the costs of each business segment and in
corporate charges, and we expect a similar incremental accrual of $2.3 million
in the fourth quarter of 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, 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). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
We have been named as a defendant in seven actions filed in the U.S. District
Court for the Southern District of New York. Three of these actions are against
the Company and Martha Stewart:
Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002), Crnkovich
v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002), and Rahilly
v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002). The other
four actions are against the Company, Stewart, seven of the Company's officers
(Gregory R. Blatt, Dora Braschi Cardinale, Sharon L. Patrick, Margaret Roach,
Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey), former director L. John
Doerr, and Kleiner Perkins Caufield & Byers: Rosen v. Martha Stewart Living
Omnimedia, Inc. (filed August 21, 2002), MacKinnon v. Martha Stewart Living
Omnimedia, Inc. (filed August 30, 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 plaintiffs in all seven of these actions assert violations of Section 10(b)
of the Securities Exchange Act of 1934, and rules promulgated thereunder. The
suits are brought on behalf of persons who acquired Company stock on the open
market and relate to Stewart's sale of 3,928 shares of ImClone Systems stock on
December 27, 2001. The plaintiffs allege that Stewart, both directly and through
representatives, speaking for herself and in her capacity as Chief Executive
Officer of the Company, made statements about the 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
Stewart's statements became public. The Hackbarth, Rosen,
18
Steele and MacKinnon complaints further allege that the individual defendants
sold Company stock while in possession of material, non-public information. The
complaints seek certification as class actions, damages, attorney's fees and
costs, and further relief as determined by the court. The Hackbarth, Rosen,
Steele and MacKinnon complaints also seek "extraordinary, equitable and/or
injunctive relief" and "any appropriate state law remedies." The court is
currently considering plaintiffs' motions to appoint a lead plaintiff, after
which a single consolidated amended complaint will be filed.
The Company has also been named as a nominal defendant in six derivative
actions, all of which name Stewart as a defendant: 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; Beam v. Stewart, initially
filed on August 15, 2002 and amended on September 6, 2002, in Delaware Chancery
Court; Alexis v. Stewart, filed on October 3, 2002 in Delaware Chancery Court;
Acosta v. Stewart, filed on October 10, 2002 in the U.S. District Court for the
Southern District of New York; and Richards v. Stewart, filed on November 1,
2002 in Connecticut Superior Court. The Company's present directors and former
director John Doerr are also named as defendants in Beam. The Company's present
directors, Doerr, five of the Company's officers (Blatt, Cardinale, Roach,
Sobel, and Towey), and Kleiner Perkins Caufield & Byers are also named as
defendants in Richards. An unopposed motion to consolidate the Beck and Kramer
actions has been filed by the plaintiffs in those actions.
All six derivative actions allege that 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 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) Stewart's
actions have jeopardized the Company's intellectual property; (ii) the directors
breached their fiduciary duties by failing to monitor Stewart's affairs to
ensure she did not harm the Company; (iii) 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) Stewart and 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 plaintiff in Alexis also alleges that Stewart
breached the terms of her employment agreement with the Company. The plaintiff
in Richards further alleges against all of the named defendants (i) intentional
breach of fiduciary duty by, among other things, acting in reckless disregard
of, and failing to prevent, 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 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 Beck and Kramer 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.
#
While still in their preliminary stages, we believe the Company has substantial
defenses to these actions.
ITEM 5. OTHER INFORMATION
Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of
1995 and Associated Risk Factors.
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 belief regarding future events, many of which, by their nature, are
inherently uncertain and outside of our control. It is possible that our actual
results may differ, possibly materially, from the anticipated results indicated
in these forward-looking statements. These statements can be identified by
terminology such as "may," "will," "should," "could," "expects," "intends,"
"plans,"
19
"anticipates," "believes," "estimates," "potential" or "continue" or the
negative of these terms or other comparable terminology. Our actual results may
differ materially from those projected in these statements, and factors that
could cause such differences include, but are not limited to, prolonged negative
publicity relating to Martha Stewart; a loss of the services, or diminution in
the reputation, of Martha Stewart; the effect on the Company of the ongoing
governmental investigations concerning a sale of non-Company stock by Martha
Stewart and certain related matters, the associated uncertainty, and any adverse
outcome of such investigations; negative resolution of some or all of our
stockholder litigation; downturns in national and/or local economies; 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; technological developments affecting products or
methods of distribution such as the Internet or e-commerce; continued
difficulties at our direct commerce fulfillment provider; operational or
financial problems at any of our contractual business partners; the receptivity
of consumers to our product introductions; and changes in government regulations
affecting our industries. Additional information regarding some of these and
other important factors that could cause actual results to differ from those in
our forward-looking statements is contained in the prospectus forming part of
our registration statement on Form S-1 (File No. 333-84001) under the caption
"Risk Factors."
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 Martha Stewart Living Omnimedia, Inc. 2002 Executive
Severance Pay Plan*
99.1 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)
* Indicates compensatory plan
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the period covered
by this report.
20
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 13, 2002 By: /s/ James Follo
------------------------------------
Name: James Follo
Title: Executive Vice President,
Chief Financial Officer
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CERTIFICATIONS
I, Martha Stewart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Martha Stewart
Living Omnimedia, Inc;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures 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 quarterly report is being prepared;
b.) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b.) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Martha Stewart
- --------------------------------------
Chairman and Chief Executive Officer
22
I, James Follo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Martha Stewart
Living Omnimedia, Inc;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures 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 quarterly report is being prepared;
b.) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b.) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ James Follo
- -------------------------------
Chief Financial Officer
23