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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission file number 001-15395
Martha Stewart Living Omnimedia, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2187059
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11 West 42nd Street, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 827-8000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of August 11, 2003
Class A, $0.01 par value 19,459,545
Class B, $0.01 par value 30,058,975
_________________________________
Total 49,518,520
=================================
-1-
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
Page
----
Part I. Financial information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
June 30, December 31,
2003 2002
---------- ----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 125,487 $ 131,664
Short-term investments 46,986 47,286
Accounts receivable, net 28,943 37,796
Inventories, net 7,234 8,654
Deferred television production costs 4,195 4,179
Income taxes receivable 2,932 --
Deferred income taxes 7,028 7,028
Other current assets 3,092 4,756
---------- ----------
TOTAL CURRENT ASSETS 225,897 241,363
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net 27,730 31,288
INTANGIBLE ASSETS, net 44,257 44,257
DEFERRED INCOME TAXES 2,827 2,827
OTHER NONCURRENT ASSETS 4,466 4,807
---------- ----------
TOTAL ASSETS $ 305,177 $ 324,542
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 30,154 40,517
Accrued payroll and related costs 5,318 9,385
Income taxes payable - 323
Current portion of deferred subscription income 25,148 24,932
---------- ----------
TOTAL CURRENT LIABILITIES 60,620 75,157
DEFERRED SUBSCRIPTION INCOME 6,465 7,715
OTHER NONCURRENT LIABILITIES 4,685 5,035
---------- ----------
TOTAL LIABILITIES 71,770 87,907
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares authorized; 19,459 and
19,342 shares outstanding in 2003 and 2002, respectively 195 194
Class B common stock, $.01 par value, 150,000 shares
authorized; 30,059 and 30,295 outstanding in 2003 and 2002, respectively 301 303
Capital in excess of par value 181,612 181,629
Unamortized restricted stock (624) (993)
Retained earnings 52,698 56,277
---------- ----------
234,182 237,410
Less: Class A treasury stock - 59 shares at cost (775) (775)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 233,407 236,635
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 305,177 $ 324,542
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES
Publishing $ 39,617 $ 47,323 $ 73,678 $ 90,417
Television 6,588 7,249 13,203 13,960
Merchandising 11,763 15,974 22,091 27,050
Internet/Direct Commerce 7,814 8,056 14,833 15,134
---------- ---------- ---------- ----------
TOTAL REVENUES 65,782 78,602 123,805 146,561
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 35,473 39,380 71,099 76,151
Selling and promotion 13,724 11,656 26,545 22,338
General and administrative 13,028 11,368 28,003 23,027
Depreciation and amortization 2,054 3,118 4,195 6,135
---------- ---------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 64,279 65,522 129,842 127,651
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 1,503 13,080 (6,037) 18,910
Interest income, net 395 568 797 1,058
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 1,898 13,648 (5,240) 19,968
Income tax benefit (provision) (665) (5,596) 2,184 (8,187)
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE LOSS FROM DISCONTINUED OPERATIONS 1,233 8,052 (3,056) 11,781
Loss from discontinued operations, net of tax
benefit (302) (1,313) (523) (2,139)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 931 6,739 (3,579) 9,642
---------- ---------- ---------- ----------
Cumulative effect of accounting change, net
of tax benefit - - - (3,137)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 931 $ 6,739 $ (3,579) $ 6,505
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements (continued)
(unaudited, in thousands, except per share amounts)
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
Income (loss) from continuing operations $ 0.02 $ 0.16 $ (0.06) $ 0.24
---------- ---------- ---------- ----------
Loss from discontinued operations (0.01) (0.03) (0.01) (0.04)
---------- ---------- ---------- ----------
Cumulative effect of accounting change - - - (0.06)
---------- ---------- ---------- ----------
Net income (loss) $ 0.02 $ 0.14 $ (0.07) $ 0.13
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 49,488 49,166 49,560 48,968
---------- ---------- ---------- ----------
Diluted 49,627 49,373 49,560 49,147
---------- ---------- ---------- ----------
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 Six Months Ended June 30, 2003
(unaudited, in thousands)
Class A Class B Capital in Unamortized Class A
Common stock Common stock Excess of Restricted Retained Treasury stock
Shares Amount Shares Amount Par Value Stock Earnings Shares Amount Total
------ ------ ------ ------ ---------- ----------- -------- ------ ------- ---------
Balance at January 1,
2003 19,342 $ 194 30,295 $ 303 $ 181,629 $ (993) $ 56,277 (59) $ (775) $ 236,635
Net loss for the
period - - - - - - (3,579) - - (3,579)
Issuance of shares
for stock option
exercises 132 1 - - 83 - - - - 84
Shares returned on
net treasury basis - - (236) (2) 2 - - - - -
Returned of
restricted stock (15) - - - (102) 102 - - - -
Amortization of
restricted stock - - - - - 267 - - - 267
------ ------ ------ ------ --------- ----------- -------- ------ ------- ---------
Balance at June 30,
2003 19,459 $ 195 30,059 $ 301 $ 181,612 $ (624) $ 52,698 (59) $ (775) $ 233,407
====== ====== ====== ====== ========= =========== ======== ====== ======= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-6-
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended
June 30,
-----------------------
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,579) $ 6,505
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change - 3,137
Depreciation and amortization 4,195 6,135
Amortization of restricted stock 267 -
Changes in operating assets and liabilities (6,807) 1,927
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,924) 17,704
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (637) (2,944)
Purchases of short-term investments - (35,475)
Sales of short-term investments 300 17,200
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (337) (21,219)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from stock option exercises 84 4,005
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 84 4,005
---------- ----------
NET INCREASE (DECREASE) IN CASH (6,177) 490
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 131,664 68,076
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 125,487 $ 68,566
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-7-
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data)
1. Accounting policies
a. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein
referred to as the "Company."
The information included in the foregoing interim condensed consolidated
financial statements is unaudited. In the opinion of management, all adjustments
which are of a normal recurring nature and necessary for a fair presentation of
the results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year. These condensed
consolidated financial statements are unaudited and should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
with respect to its fiscal year ended December 31, 2002.
b. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Management does not expect
such differences to have a material effect on the Company's consolidated
financial statements.
c. Income taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS 109,
deferred assets and liabilities are recognized for the future costs and benefits
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
d. Reclassifications
The prior year periods have been restated to reflect as discontinued operations
the results of the operations discussed in Note 5.
e. Intangible assets
Commencing January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to an
annual assessment for impairment by applying a fair-value based test. The
Company completed the initial impairment tests in the second quarter of 2002
which resulted in a charge of $5,039 ($3,137 net of income taxes) to reduce the
carrying value of its goodwill related to The Wedding List. In accordance with
the SFAS 142 transition rules, we have presented these amounts in the first
quarter of 2002. The remaining intangible assets represent goodwill of the
Publishing segment and its fair value exceeds the carrying value.
-8-
f. Stock Compensation
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation," the Company has elected to continue
accounting for employee stock compensation under the APB 25 rules, but disclose
pro forma results using SFAS No. 123's alternative accounting treatment, which
calculates the total compensation expense to be recognized as the fair value of
the award at the date of grant. The fair value of options granted were estimated
on the grant date using the Black-Scholes option pricing model, using the
following assumptions for the three month periods ended June 30, :
2003 2002
------- -------
risk-free interest rates 2.64% 5.12%
dividend yields zero zero
expected volatility 139% 134%
expected option life 6 years 6 years
average fair market
value per option granted $ 9.16 $ 16.33
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options over the relevant vesting periods. The pro
forma effect on net loss for the three and six month periods ended June 30, 2003
and 2002 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss), as reported $ 931 $ 6,739 $ (3,579) $ 6,505
---------- ---------- ---------- ----------
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects 3,955 3,639 7,906 7,278
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (3,024) $ 3,100 $ (11,485) $ (773)
========== ========== ========== ==========
Income (loss) per share:
Basic and diluted - as reported $ 0.02 $ 0.14 $ (0.07) $ 0.13
Basic and diluted - pro forma $ ( 0.06) $ 0.06 $ (0.23) $ (0.02)
-9-
2. Inventories
The components of inventories are as follows:
June 30, December 31,
2003 2002
---------- ----------
Paper $ 3,576 $ 4,861
Product merchandise 8,222 8,887
---------- ----------
11,798 13,748
Less: reserve for obsolete and
excess inventory 4,564 5,094
---------- ----------
$ 7,234 $ 8,654
========== ==========
3. Earnings (loss) per share
Earnings (loss) per share are computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings (loss) per share are calculated by dividing
net income (loss) by the weighted-average number of common shares outstanding
during each period. Diluted earnings (loss) per share include the determinants
of basic earnings (loss) per share and, in addition, give effect to potentially
dilutive common shares.
4. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business segments are
Publishing, Television, Merchandising and Internet/Direct Commerce. The
Publishing segment primarily consists of the Company's magazine operations, and
also those related to its book, radio and newspaper businesses. The Television
segment consists of the Company's television production operations that produce
television programming that airs in syndication in the United States and on
cable in the United States, Canada and Japan. The Merchandising segment
primarily consists of the Company's operations related to the design of
merchandise and related promotional and packaging materials that are distributed
by its retail and manufacturing partners under Company trademarks in exchange
for royalty income. The Internet/Direct Commerce segment comprises the Company's
operations relating to its catalog, Martha Stewart: The Catalog For Living, and
the website marthastewart.com.
The following presents segment and consolidated financial information for the
three and six month periods ended June 30, 2003 and 2002, including a
reconciliation of operating income, a GAAP measure, and Operating Income before
Depreciation and Amortization (OIDA), a non-GAAP measure. The Company believes
OIDA is an appropriate measure when evaluating the operating performance of its
business segments and the Company on a consolidated basis. OIDA is used
externally by the Company's investors, analysts, and industry peers. OIDA is
among the primary metrics used by management for planning and forecasting of
future periods, and is considered an important indicator of the operational
strength of the Company's businesses. The Company believes the presentation of
this measure is relevant and useful for investors because it allows investors to
view performance in a manner similar to the method used by the Company's
management and makes it easier to compare the Company's results with other
companies that have different capital structures or tax rates. The Company
believes OIDA should be considered in addition to, not as a substitute for,
operating income (loss), net income (loss), cash flows, and other measures of
financial performance prepared in accordance with generally accepted accounting
principles ("GAAP"). As OIDA is not a measure of performance calculated in
accordance with GAAP, this measure may not be comparable to similarly titled
measures employed by other companies. In order to reconcile OIDA to operating
income, depreciation and amortization are added back to operating income.
-10-
Three months ended June 30,
---------------------------
2003 2002
---- ----
REVENUES
Publishing $ 39,617 $47,323
Television 6,588 7,249
Merchandising 11,763 15,974
Internet/Direct Commerce 7,814 8,056
-------- -------
TOTAL REVENUES $ 65,782 $78,602
======== =======
OPERATING INCOME
Publishing $ 9,335 $16,530
Television 2 937
Merchandising 7,808 12,350
Internet/ Direct Commerce (4,552) (7,434)
-------- -------
Operating Income before Corporate Overhead 12,593 22,383
Corporate Overhead (11,090) (9,303)
-------- -------
TOTAL OPERATING INCOME $ 1,503 $13,080
======== =======
DEPRECIATION AND AMORTIZATION
Publishing $ 41 $ 39
Television 385 436
Merchandising 168 158
Internet/ Direct Commerce 244 741
Corporate Overhead 1,216 1,744
-------- -------
TOTAL DEPRECIATION AND AMORTIZATION $ 2,054 $ 3,118
======== =======
OPERATING INCOME (LOSS) BEFORE
DEPRECIATION AND AMORTIZATION
Publishing $ 9,376 $16,569
Television 387 1,373
Merchandising 7,976 12,508
Internet/ Direct Commerce (4,308) (6,693)
-------- -------
Operating Income before Depreciation and
Amortization before Corporate Overhead 13,431 23,757
-------- -------
Corporate Overhead (9,874) (7,559)
-------- -------
TOTAL OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION $ 3,557 $16,198
======== =======
Six months ended June 30,
-------------------------
2003 2002
-------- --------
REVENUES
Publishing $ 73,678 $ 90,417
Television 13,203 13,960
Merchandising 22,091 27,050
Internet/Direct Commerce 14,833 15,134
-------- --------
TOTAL REVENUES $123,805 $146,561
======== ========
-11-
Six months ended June 30,
-------------------------
2003 2002
------- -------
OPERATING INCOME (LOSS)
Publishing $ 14,306 $ 31,742
Television 229 1,293
Merchandising 14,842 19,790
Internet/ Direct Commerce (12,804) (14,819)
-------- --------
Operating Income before Corporate Overhead 16,573 38,006
Corporate Overhead (22,610) (19,096)
-------- --------
TOTAL OPERATING INCOME (LOSS) $ (6,037) $ 18,910
======== ========
DEPRECIATION AND AMORTIZATION
Publishing $ 82 $ 79
Television 779 869
Merchandising 337 317
Internet/ Direct Commerce 491 1,377
Corporate Overhead 2,506 3,493
-------- --------
TOTAL DEPRECIATION AND AMORTIZATION $ 4,195 $ 6,135
======== ========
OPERATING INCOME (LOSS) BEFORE
DEPRECIATION AND AMORTIZATION
Publishing $ 14,388 $ 31,821
Television 1,008 2,162
Merchandising 15,179 20,107
Internet/ Direct Commerce (12,313) (13,442)
-------- --------
Operating Income before Depreciation and Amortization
before Corporate Overhead 18,262 40,648
-------- --------
Corporate Overhead (20,104) (15,603)
-------- --------
TOTAL OPERATING INCOME (LOSS) BEFORE
DEPRECIATION AND AMORTIZATION $ (1,842) $ 25,045
======== ========
5. Discontinued Operations
In June 2002, the Company decided to exit The Wedding List, a wedding registry
and gift business that was reported within the Internet/Direct Commerce business
segment. All prior period financial statements were restated to report the
operations as a discontinued operation.
Summary operating results for The Wedding List were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues $ - $ 510 $ 580 $ 1,250
------- ------- ------- -------
Operating loss before income tax benefit (464) (2,225) (804) (3,511)
------- ------- ------- -------
Loss from discontinued operations, net of
tax benefit $ (302) $(1,313) $ (523) $(2,139)
======= ======= ======= =======
-12-
6. Supplemental cash flow information:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ---------------------
2003 2002 2003 2002
----- ------ ------ ------
Cash paid for interest - $ 40 $ 15 $ 99
Cash paid for income taxes - $3,597 $1,529 $4,229
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart
Living Omnimedia, Inc., and its subsidiaries.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 TO THREE MONTHS ENDED JUNE 30,
2002
Three Months Ended
June 30,
--------------------
2003 2002
-------- --------
REVENUES
Publishing $ 39,617 $ 47,323
Television 6,588 7,249
Merchandising 11,763 15,974
Internet/Direct Commerce 7,814 8,056
-------- --------
TOTAL REVENUES 65,782 78,602
-------- --------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 35,473 39,380
Selling and promotion 13,724 11,656
General and administrative 13,028 11,368
Depreciation and amortization 2,054 3,118
-------- --------
TOTAL OPERATING COSTS AND EXPENSES 64,279 65,522
-------- --------
OPERATING INCOME 1,503 13,080
Interest income, net 395 568
-------- --------
INCOME BEFORE INCOME TAXES 1,898 13,648
Income tax provision (665) (5,596)
-------- --------
Income from continuing operations
before loss from discontinued operations 1,233 8,052
-------- --------
Loss from discontinued operations, net of tax
benefit (302) (1,313)
-------- --------
NET INCOME $ 931 $ 6,739
======== ========
-14-
Revenues. Total revenues decreased $12.8 million, or 16.3%, to $65.8 million
for the quarter ended June 30, 2003, from $78.6 million for the quarter ended
June 30, 2002. Publishing revenues decreased $7.7 million, or 16.3%, to $39.6
million for the quarter ended June 30, 2003, from $47.3 million for the quarter
ended June 30, 2002. This decrease was primarily due to lower advertising
revenues of $6.1 million, and lower circulation revenues of $1.5 million. The
decrease in advertising revenues resulted primarily from fewer advertising pages
and lower advertising rates in Martha Stewart Living magazine, as well as lower
advertising revenues from Special Interest Publications, partially offset by
advertising revenues related to a new publication, Everyday Food, and to the
publication of an additional issue of Martha Stewart Weddings in the quarter.
The decrease in circulation revenues primarily resulted from lower newsstand and
subscription revenues from Martha Stewart Living magazine, in addition to lower
newsstand revenue from our Special Interest Publications, partially offset by
circulation revenue from Everyday Food and the additional issue of Martha
Stewart Weddings. Television revenues decreased $0.7 million, or 9.1%, to $6.6
million for the quarter ended June 30, 2003, from $7.2 million for the quarter
ended June 30, 2002. The decrease is primarily attributable to lower syndicated
advertising revenue resulting primarily from lower ratings from our syndicated
daily program. Additionally, the loss of the company's airtime on CBS The Early
Show contributed to an additional $0.2 million decline. Merchandising revenues
decreased $4.2 million, or 26.4%, to $11.8 million for the quarter ended June
30, 2003, from $16.0 million for the quarter ended June 30, 2002, primarily as a
result of lower sales of Martha Stewart Everyday branded products at Kmart,
resulting in a decrease in royalty revenue of $4.5 million principally due to
store closings, the elimination of certain product offerings in the Martha
Stewart Everyday Garden Line at Kmart and lower same store sales, partially
offset by an increase in our royalty rate. The royalty rate under our agreement
with Kmart increased 9% on February 1, 2003. Royalty revenues from sales of
products at Zellers in Canada declined $0.3 million in the current years
quarter, as the agreement with Zellers expired on January 31, 2003. In September
2003, we will begin selling Martha Stewart Everyday products in Canada through
an agreement with Sears Canada. These decreases were partially offset by an
increase in royalties of $0.5 million earned from sales of Martha Stewart
Signature products. Kmart emerged from bankruptcy on May 6th, 2003. While
operating under Chapter 11 of the Federal Bankruptcy Code, Kmart closed 283
stores in 2002 and an additional 316 stores in 2003. The Company has recognized
royalty revenues earned under our agreement with Kmart based upon actual
royalties earned, not contractual minimum amounts. Contractual minimum amounts
under our agreement with Kmart are computed on January 31st annually each year
and paid shortly thereafter. The Company currently expects earned royalties,
which are paid quarterly, to be below the annual minimum amount. We expect to
recognize the difference between the minimum royalty amount and royalties paid
on actual sales in the fourth quarter of 2003, when the amount can be
determined. Internet/Direct Commerce revenues decreased $0.2 million, or 3.0%,
to $7.8 million for the quarter ended June 30, 2003, from $8.1 million for the
quarter ended June 30, 2002. Lower advertising revenue of $0.8 million, was
partially offset by higher commerce sales of $0.5 million resulting principally
from higher catalog circulation and marketing spending.
Magazine Publication Schedule
Second Quarter 2003 Second Quarter 2002
- ------------------------------------------------------------------------------------------------
Martha Stewart Living Three Issues Three Issues
Martha Stewart Weddings Two Issues One Issue
Everyday Food Two Issues No Issue
Special Interest Publications Two Issues Two Issues
Production, distribution and editorial. Production, distribution and editorial
expenses decreased $3.9 million, or 9.9%, to $35.5 million for the quarter ended
June 30, 2003, from $39.4 million for the quarter ended June 30, 2002.
Publishing segment costs decreased $1.9 million reflecting lower paper, printing
and distribution costs of Martha Stewart Living magazine primarily due to lower
number of pages printed per issue, partially offset by costs associated with the
publication of two issues of Everyday Food and an additional issue of Martha
Stewart Weddings. Internet/Direct Commerce costs decreased $2.3 million,
reflecting lower fulfillment costs of $0.8 million, lower product costs of $1.5
million, lower technology and content creation costs of $0.4 million, and lower
product development and creative costs of $0.3 million, offset by higher catalog
production costs of $0.9 million.
Selling and promotion. Selling and promotion expenses increased $2.1 million, or
17.7%, to $13.7 million for the quarter ended June 30, 2003, from $11.7 million
for the quarter ended June 30, 2002. Publishing segment costs increased $0.9
million, or 8.8%, resulting primarily from higher circulation acquisition costs
relating to Everyday Food, partially offset by lower spending related to Martha
Stewart Living. Corporate costs increased $0.6 million as a result of media
spending associated with a corporate advertising program. Television segment
costs increased $0.2 million, resulting primarily from higher marketing and
promotion expenses related to the syndicated program.
General and administrative. General and administrative expenses increased $1.7
million, or 14.6%, to $13.0 million for the quarter ended June 30, 2003, from
$11.4 million for the quarter ended June 30, 2002. Corporate costs increased
$1.7 million, or 22.6%, principally resulting from higher legal expenses of
-15-
$0.8 million primarily resulting from corporate matters associated with various
investigations related to a personal sale of non-Company stock by Martha
Stewart, a Director of the Company and it's Chief Creative Officer, and related
corporate litigation and higher insurance costs of $0.8 million. Internet/Direct
Commerce segment costs decreased $0.5 million primarily as result of lower
headcount.
Depreciation and amortization. Depreciation and amortization decreased $1.1
million, or 34.1%, to $2.1 million for the quarter ended June 30, 2003, from
$3.1 million for the quarter ended June 30, 2002. The decrease is primarily due
to lower depreciation associated with the Company's website, which was written
down by $6.1 million in the fourth quarter of 2002 in connection with a
restructuring of the Internet/Direct Commerce segment.
Interest income, net. Interest income, net, was $0.4 million for the quarter
ended June 30, 2003, compared with $0.6 million for the quarter ended June 30,
2002. Higher average cash balances throughout the quarter were more than offset
by lower interest yields on cash and short-term investments.
Income tax benefit (provision). Income tax provision for the quarter ended June
30, 2003 was $0.7 million, representing a 35% effective income tax rate,
compared to an income tax provision of $5.6 million representing an effective
income tax rate of 41.0% for the quarter ended June 30, 2002. The effective
income tax rate in the current quarter of 2003 reflects the federal tax rate of
35%, without giving benefit to state income tax carry-backs. State income tax
benefits available to the Company resulting from the carry-back of losses to
prior years is limited. Accordingly, the Company has not recognized any state
tax benefit for the quarter ended June 30, 2003. Furthermore, no tax benefit has
been assumed for state and local loss carry-forwards to future periods.
Loss from discontinued operations. Loss from discontinued operations was $0.3
million (net of tax) for the quarter ended June 30, 2003, compared to $1.3
million (net of tax) from the same operations for the quarter ended June 30,
2002. Discontinued operations represent the operations of the Wedding List,
which the Company discontinued in 2002. The current period expenses are
primarily facility related.
Net Income. Net Income was $0.9 million for the quarter ended June 30, 2003,
compared to a net income of $6.7 million for the quarter ended June 30, 2002, as
a result of the above mentioned factors.
-16-
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS ENDED JUNE 30, 2002
2003 2002
--------- ---------
REVENUES
Publishing $ 73,678 $ 90,417
Television 13,203 13,960
Merchandising 22,091 27,050
Internet/Direct Commerce 14,833 15,134
--------- ---------
TOTAL REVENUES 123,805 146,561
--------- ---------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 71,099 76,151
Selling and promotion 26,545 22,338
General and administrative 28,003 23,027
Depreciation and amortization 4,195 6,135
--------- ---------
TOTAL OPERATING COSTS AND EXPENSES 129,842 127,651
--------- ---------
OPERATING INCOME (LOSS) (6,037) 18,910
Interest income, net 797 1,058
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,240) 19,968
Income tax benefit (provision) 2,184 (8,187)
--------- ---------
Income (loss) from continuing operations
before loss from discontinued operations
and cumulative effect of accounting change (3,056) 11,781
--------- ---------
Loss from discontinued operations, net of tax
benefit (523) (2,139)
--------- ---------
Income (loss) before cumulative effect of
accounting change (3,579) 9,642
Cumulative effect of accounting change, net
of tax benefit - (3,137)
--------- ---------
NET INCOME (LOSS) $ (3,579) $ 6,505
========= =========
-17-
Revenues. Total revenues decreased $22.8 million, or 15.5%, to $123.8 million
for the six months ended June 30, 2003, from $146.6 million for the six months
ended June 30, 2002. Publishing revenues decreased $16.7 million, or 18.5%, to
$73.7 million for the six months ended June 30, 2003, from $90.4 million for the
six months ended June 30, 2002. This decrease was primarily due to lower
advertising revenues of $12.7 million, lower circulation revenues of $3.2
million and decreased revenues from our book business of $0.8 million. The
decrease in advertising revenue resulted primarily from fewer advertising pages
and lower advertising rates in Martha Stewart Living magazine, as well as lower
advertising revenues from Special Interest Publications, partially offset by
advertising revenues related to a new publication, Everyday Food and the
publication of an additional issue of Martha Stewart Weddings. The decrease in
circulation revenues primarily resulted from lower newsstand and subscription
revenues from Martha Stewart Living magazine, partially offset by circulation
revenues from Everyday Food magazine and an additional issue of Martha Stewart
Weddings. Television revenues decreased $0.8 million, or 5.4%, to $13.2 million
for the six months ended June 30, 2003, from $14.0 million for the six months
ended June 30, 2002. The decrease is primarily attributable to lower syndicated
advertising revenue of $0.5 million resulting primarily from lower ratings from
our syndicated daily program as well as lower licensing fees from our syndicated
daily program of $0.3 million. Additionally, the loss of the company's airtime
on CBS The Early Show contributed to an additional $0.4 million decline. This
reduction was partially offset by higher cable revenues of $0.5 million due to
additional cable television programming. Merchandising revenues decreased $5.0
million, or 18.3%, to $22.1 million for the six months ended June 30, 2003, from
$27.1 million for the six months ended June 30, 2002, primarily as a result of
lower sales of Martha Stewart Everyday branded products at Kmart resulting in a
decrease in royalty revenue of $5.6 million, principally due to store closings,
the elimination of certain product offerings in the Martha Stewart Everyday
Garden Line at Kmart and lower same store sales, partially offset by an increase
in royalty rate in the current period. The royalty rate under our agreement with
Kmart increased 9% on February 1, 2003. Royalty revenues from sales of products
at Zellers in Canada declined $0.6 million in the current period, as the
agreement with Zellers expired on January 31, 2003. In September 2003, we will
begin selling Martha Stewart Everyday products in Canada through an agreement
with Sears Canada. These decreases were partially offset by an increase in
royalties of $1.2 million earned from sales of Martha Stewart Signature
products. Kmart emerged from bankruptcy on May 6th, 2003. While operating under
Chapter 11 of the Federal Bankruptcy Code, Kmart closed 283 stores in 2002 and
an additional 316 stores in 2003. The Company has recognized royalty revenues
earned under our agreement with Kmart based upon actual royalties earned, not
contractual minimum amounts. Contractual minimum amounts under our agreement
with Kmart are computed on January 31st annually each year and paid shortly
thereafter. The Company currently expects earned royalties, which are paid
quarterly, to be below the annual minimum amount. We expect to recognize the
difference between the minimum royalty amount and royalties paid on actual sales
in the fourth quarter of 2003, when the amount can be determined.
Internet/Direct Commerce revenues decreased $0.3 million, or 2.0%, to $14.8
million for the six months ended June 30, 2003, from $15.1 million for the six
months ended June 30, 2002. Lower advertising revenue in the segment of $1.3
million was partially offset by higher commerce sales of $1.1 million, resulting
principally from higher catalog circulation and marketing spending.
Magazine Publication Schedule
First Half 2003 First Half 2002
- ---------------------------------------------------------------------------------------------
Martha Stewart Living Six Issues Six Issues
Martha Stewart Weddings Two Issues One Issue
Everyday Food Four Issues No Issues
Special Interest Publications Four Issues Three Issues
Production, distribution and editorial. Production, distribution and editorial
expenses decreased $5.1 million, or 6.6%, to $71.1 million for the six months
ended June 30, 2003, from $76.2 million for the six months ended June 30, 2002.
Publishing segment costs decreased $2.4 million reflecting lower paper, printing
and distribution costs of Martha Stewart Living magazine primarily due to lower
number of pages printed per issue, partially offset by the additional costs
associated with the addition of four issues of Everyday Food, and an incremental
issue of Martha Stewart Weddings, as well as lower costs of $0.7 million
associated with our book business. Internet/Direct Commerce costs decreased $2.4
million, reflecting lower fulfillment costs of $1.7 million, lower product costs
of $1.4 million and lower technology and content creation costs of $1.1 million
and lower product development and creative of $0.4 million, offset by higher
catalog production costs of $2.5 million.
Selling and promotion. Selling and promotion expenses increased $4.2 million, or
18.8%, to $26.5 million for the six months ended June 30, 2003, from $22.3
million for the six months ended June 30, 2002. Publishing segment costs
increased $2.4 million, or 11.6%, resulting primarily from circulation
acquisition costs relating to Everyday Food partially offset by lower
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spending related to Martha Stewart Living magazine. Television segment costs
increased $0.6 million, resulting primarily from higher marketing and promotion
expenses related to the syndicated program. Corporate costs increased $0.7
million as a result of media spending relating to a corporate advertising
program.
General and administrative. General and administrative expenses increased $5.0
million, or 21.6 %, to $28.0 million for the six months ended June 30, 2003,
from $23.0 million for the six months ended June 30, 2002. Corporate costs
increased $3.7 million, or 23.9%, principally resulting from higher legal
expenses of $2.0 million primarily resulting from corporate matters associated
with various investigations related to a personal sale of non-Company stock by
Martha Stewart, a Director of the Company and its Chief Creative Officer, and
related corporate litigation, and higher insurance costs of $1.6 million.
Publishing segment costs increased $0.6 million primarily due to losses related
to our Japanese publishing venture. Internet/Direct Commerce segment costs
increased $0.5 million mainly resulting primarily from higher consulting fees.
Depreciation and amortization. Depreciation and amortization decreased $1.9
million, or 31.6%, to $4.2 million for the six months ended June 30, 2003, from
$6.1 million for the six months ended June 30, 2002. The decrease is primarily
due to lower depreciation associated with the Company's website, which was
written down by $6.1 million in the fourth quarter of 2002 in connection with a
restructuring of the Internet/Direct Commerce segment.
Interest income, net. Interest income, net, was $0.8 million for the six months
ended June 30, 2003, compared with $1.1 million for the six months ended June
30, 2002. Higher average cash balances throughout the six months were more than
offset by lower interest yields on cash and short-term investments.
Income tax benefit (provision). Income tax benefit for the six months ended June
30, 2003 was $2.2 million, representing a 42% effective income tax rate,
compared to an income tax provision of $8.2 million representing an effective
income tax rate of 41.0% for the six months ended June 30, 2002. The effective
income tax rate in 2003 reflects the federal benefit of 35% associated with the
Company's loss in the six months, in addition to the tax benefit of foreign
income taxes in the six months. State tax benefits available to the Company
resulting from the carry-back of losses to prior years is limited. Accordingly,
the Company has not recognized any state tax benefit for the six months ended
June 30, 2003. Furthermore, no tax benefit has been assumed for state and local
loss carry-forwards to future periods.
Loss from discontinued operations. Loss from discontinued operations was $0.5
million for the six months ended June 30, 2003, compared to $2.1 million from
the same operations for the six months ended June 30, 2002. Discontinued
operations represent the operations of the Wedding List, which the Company
decided to discontinue in 2002. The current year expenses are primarily facility
related.
Cumulative Effect Of Accounting Change. As part of the implementation of SFAS
No. 142, the Company completed the initial impairment tests in the second
quarter of 2002, with a January 1 2002 effective date, which resulted in a
charge of approximately $5.0 million ($3.1 million after taxes) to reduce the
carrying value of its goodwill related to the Internet/Direct Commerce segment
attributable to its 2001 acquisition of The Wedding List. The remaining
intangible assets represent goodwill of the Publishing segment and its fair
value exceeds the carrying value.
Net Loss. Net loss was ($3.6) million for the six months ended June 30, 2003,
compared to a net income of $6.5 million for the six months ended June 30, 2002,
as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $125,487 and $131,664 and short-term investments
were $46,986 and $47,286 at June 30, 2003 and December 31, 2002, respectively.
Cash flows used in operating activities were $5.9 million during the six months
ended June 30, 2003, compared to cash provided by operating activities of $17.7
million during the six months ended June 30, 2002. Cash used in operating
activities during the six months ended June 30, 2003 were primarily due to a net
loss for the period of $3.6 million and changes in operating assets and
liabilities of $6.8 million, partially offset by depreciation and amortization
of $4.2 million. Cash used by changes in operating assets and liabilities during
the period is primarily a result of decreases in accounts payable and accrued
liabilities and accrued payroll and related costs, partially offset by decreased
accounts receivable. During the six months ended June 30, 2002, cash flows from
operating activities of $17.7 million resulted primarily from net income in the
period increased by non-cash charges for depreciation and amortization, the
write-off of goodwill resulting from the adoption of FAS No. 142 and accrued
losses related to discontinued operations.
-19-
Cash flows used in investing activities were $0.3 million and $21.2 million
during the six months ended June 30, 2003 and 2002, respectively. Cash flows
used in investing activities in 2003 resulted from capital expenditures offset
by the sale of short-term investments. Cash flows used in investing activities
in 2002 resulted from a net increase in short-term investments of $18.3 million
and capital expenditures of $2.9 million and the purchase of short-term
securities.
Cash flows provided by financing activities for the six month periods ended June
30, 2003 and 2002 were $0.1 and $4.0 million, respectively, representing
proceeds received from the exercise of employee stock options.
We have a line of credit with Bank of America in the amount of $10 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of June 30, 2003, we had no outstanding borrowings under
this facility.
We believe that our available cash balances together any funds available under
existing credit facilities will be sufficient to meet our operating and
recurring cash needs for foreseeable periods. We have not paid dividends on our
common stock and have no intention to pay any dividends in the foreseeable
future.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, in our Publishing segment, the publication schedule of special
interest publications can vary from quarter to quarter. Internet/Direct Commerce
revenues have tended to be higher in the fourth quarter due to increased catalog
circulation and consumer spending during that period, although revenue in the
fourth quarter of 2003 will likely be lower than revenue in the fourth quarter
of 2002, due to a planned catalog circulation decline. Revenues from the
Merchandising segment can vary significantly from quarter to quarter due to new
product launches and the seasonality of certain product lines. In addition, we
expect to record the difference between royalties paid by Kmart and the minimum
contractual amounts due under the contract in the fourth quarter of 2003, when
such amount can be determined.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, inventories, long-lived assets and accrued losses. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies, the following may
involve the highest degree of judgment and complexity.
Revenue Recognition
Revenues are recognized when realized or realizable and earned. Revenues and
associated accounts receivable are recorded net of provisions for estimated
future returns, doubtful accounts and other allowances. Newsstand revenues in
our Publishing segment and product sales in our Internet/Direct Commerce segment
are recognized based upon assumptions with respect to future returns. The
Company bases its estimates on historical experience and current market
conditions. Reserves are adjusted regularly based upon actual results. We
maintain allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Receivables for
royalties in our merchandising business are accrued on a monthly basis and
payment is made by our strategic partners and are generally paid on a quarterly
basis. For the six month period ended June 30, 2003, the Company has recognized
royalty revenues earned under our agreement with Kmart based upon actual
royalties earned, not contractual minimum amounts. Contractual minimum amounts
under the agreement with Kmart are computed on January 31st annually and are
payable shortly thereafter. We expect to recognize the difference between the
-20-
minimum royalty amount and royalties paid on actual sales in the fourth quarter
of 2003, when the amount can be determined.
Inventory
Inventory, consisting of paper and product merchandise, is stated at the lower
of cost or market. The Company has recorded a reserve for excess and obsolete
product inventory, reducing inventory from cost to estimated market value, based
upon historical experience and current market conditions. The reserve is
evaluated regularly based upon actual results and adjusted accordingly.
Television Production Costs
Television production costs are capitalized and amortized based upon estimates
of future revenues to be received for the applicable television product. The
Company bases its estimates on existing contracts for programs, historical
advertising rates and ratings as well as market conditions. Estimated future
revenues are adjusted regularly based upon actual results and changes in market
and other conditions.
Long-Lived Assets
We review the carrying values of our long-lived assets whenever events or
changes in circumstances indicate that such carrying values may not be
recoverable. Unforeseen events and changes in circumstances and market
conditions and material differences in the value of long-lived assets due to
changes in estimates of future cash flows could negatively affect the fair value
of our assets and result in an impairment charge.
TRENDS, RISKS AND UNCERTAINTIES
On June 4, 2003, a federal grand jury in the Southern District of New York
indicted Martha Stewart, then the Company's Chairman and Chief Executive
Officer, on charges of obstruction of an agency proceeding, making false
statements to federal investigators, conspiracy, and securities fraud. That same
day, the Securities and Exchange Commission ("SEC") filed a civil complaint
against Ms. Stewart, in the United States District Court for the Southern
District of New York, alleging violations of federal securities law. The charges
in the indictment and the SEC civil action relate to a sale by Ms. Stewart of
non-Company stock and her alleged conduct during the subsequent investigations.
Following the indictment, Ms. Stewart resigned her positions as Chairman and
Chief Executive Officer, but retained her roles as a director and the Company's
Chief Creative Officer. A trial on the criminal charges against Ms. Stewart
currently is scheduled to begin on January 12, 2004 in the Southern District of
New York. The SEC action has been stayed until further order of the court.
Since June 2002, public disclosure of various governmental investigations into
this stock sale, including an investigation by a committee of the United States
Congress, has generated a great deal of negative publicity surrounding Ms.
Stewart. Because our principal brand labels are closely associated with Ms.
Stewart, we have seen since June 2002 substantial negative impacts on our
business as a result of the uncertainty surrounding the resolution of these
legal proceedings and associated negative publicity. Although it is difficult to
quantify with any precision, we believe that, to date, the uncertainty and
publicity surrounding these matters have contributed substantially to the
following trends and uncertainties our business has experienced since June 2002:
a decline in the circulation results and prospects of our magazines; a decrease
in advertising revenues and a general uncertainty in our advertising sales
prospects; a softness in response rates in our direct commerce business; and a
slowdown in new business development and new partner initiatives. In addition,
the Company is incurring additional expenses, principally relating to corporate
communications and corporate professional fees, associated with the matter. We
believe that the uncertainty and negative publicity surrounding the criminal
trial will continue to substantially impact our business at least until the
resolution of the proceeding. While we believe that a positive resolution to the
proceeding would have a significant positive impact on our business, and a
negative resolution would have a further negative impact on our business, we are
unable to predict with any certainty the extent to which our business would be
impacted in either event.
Our Merchandising segment is highly dependent on Kmart Corporation, which has
recently emerged from operating under Chapter 11 of the United States Bankruptcy
Code. To the extent that Kmart is unable to successfully operate outside of
Chapter 11, 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 2003, we expect our royalties based on actual product
sales to be less than those guaranteed in our contract with Kmart. Because of
the particular mechanics relating to the calculation of the minimum guarantee
amounts in the contract, it is impossible to ascertain at this time the exact
amount that will be payable to us under that provision. However, the aggregate
-21-
amount payable to us under the contract for the twelve-month period ending
January 31, 2004 will be at least $47.5 million.
In March 2003, we commenced a restructuring of our Internet/Direct Commerce
segment. We expect this restructuring will result in decreased revenues, costs
and operating losses from this segment in 2003, although we cannot predict with
certainty the extent and timing of these decreases.
For the television season that begins in September 2003, the Company has
secured distribution for the Martha Stewart Living syndicated program in over
80% of U.S. television households, however, at significantly lower aggregate
license fees. Additionally, there can be no assurance that we will be able to
sustain historical levels of license fees from other programming in the segment.
Accordingly, we expect to incur moderate losses in this segment during the next
twelve months.
In light of the continuing uncertainties relating to our businesses during this
period and the evolving marketplace reactions to Ms. Stewart's legal situation,
we are constantly evaluating all aspects of our business and cost structure to
endeavor to achieve the appropriate balance between short-term profitability and
long-term shareholder value.
We have included in this Quarterly Report certain "forward looking statements"
as that term is defined in The Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but instead represent
only our current beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside of our control. It is possible that
our actual results may differ, possibly materially, from the anticipated results
indicated in these forward-looking statements. These statements can be
identified by terminology such as "may," "will," "should," "could," "expects,"
"intends," "plans," "anticipates," "believes," "estimates," "potential" or
"continue" or the negative of these terms or other comparable terminology. The
Company's actual results may differ materially from those projected in these
statements, and factors that could cause such differences include further
adverse reaction to the prolonged and continued negative publicity relating to
Martha Stewart by consumers, advertisers and business partners; a loss of the
services, or diminution in the reputation, of Ms. Stewart; further adverse
reaction by the Company's consumers, advertisers and business partners to the
uncertainty relating to the nature of the resolution of the criminal and civil
proceedings pending against Ms. Stewart concerning a sale of non-Company stock
by Ms. Stewart and any adverse resolution of such proceedings; adverse
resolution of some or all of the Company's ongoing litigation; downturns in
national and/or local economies; an inability to execute the restructuring of
our Internet/Direct Commerce segment as planned; shifts in our business
strategies; a softening of the domestic advertising market; changes in consumer
reading, purchasing and/or television viewing patterns; unanticipated increases
in paper, postage or printing costs; operational or financial problems at any of
our contractual business partners; the receptivity of consumers to our new
product introductions; and changes in government regulations affecting the
Company's industries. Certain of these and other factors are discussed in more
detail in other parts of this report, especially in this section, "Management's
Discussion and Analysis".
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934) as of June 30, 2003. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 3, 2003, the Company was named as a defendant in a Consolidated and
Amended Class Action Complaint (the "Consolidated Class Action Complaint"),
filed in the United States District Court for the Southern District of New York,
by plaintiffs purporting to represent a class of persons who purchased common
stock in the Company between January 8, 2002 and October 2, 2002. In re Martha
Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The
Consolidated Class Action Complaint also names Martha Stewart and seven of the
Company's other officers (Gregory R. Blatt, Dora Braschi Cardinale, Sharon L.
Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey
(collectively, the "Individual Defendants")) as defendants. The action
consolidates seven class actions previously filed in the Southern District of
New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002),
Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002),
MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002),
Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002),
Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002),
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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, attorney's fees
and costs, and further relief as determined by the court.
The Company has also been named as a nominal defendant in five derivative
actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart
Living Omnimedia, Inc. Shareholder Derivative Litigation, filed on December 19,
2002 in New York State Supreme Court; Beam v. Stewart, initially filed on August
15, 2002 and amended on September 6, 2002, in Delaware Chancery Court; Acosta v.
Stewart, filed on October 10, 2002 in the U.S. District Court for the Southern
District of New York; Richards v. Stewart, filed on November 1, 2002 in
Connecticut Superior Court; and Sargent v. Martinez, filed on May 30, 2003 in
the U.S. District Court for the Southern District of New York. Arthur Martinez,
Darla Moore, Jeffrey Ubben and Sharon Patrick, each directors of the Company,
and John Doerr and Naomi Seligman, each former directors of the Company
(collectively, the "Director Defendants"), are also named as defendants in Beam.
The Director Defendants and five of the Company's officers (Mr. Blatt, Ms.
Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins Caufield &
Byers are also named as defendants in Richards. Mr. Martinez, Ms. Moore, Ms.
Patrick, Ms. Seligman and Mr. Ubben are also named as defendants in Sargent. In
re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation
consolidates three previous derivative complaints filed in New York State
Supreme Court and Delaware Chancery Court: Beck v.Stewart, filed on August 13,
2002 in New York State Supreme Court, Kramer v. Stewart, filed on August 20,
2002 in New York State Supreme Court and Alexis v. Stewart, filed on October 3,
2002 in Delaware Chancery Court.
All five derivative actions allege that Ms. Stewart breached her fiduciary
duties to the Company by engaging in insider trading in ImClone stock and making
false and misleading statements about such trading. The plaintiffs allege that
these actions have diminished Ms. Stewart's reputation and injured the Company
through lost revenues, loss of reputation and good will, decreased stock price,
and increased costs. The plaintiff in Beam further alleges that (i) Ms.
Stewart's actions have jeopardized the Company's intellectual property; (ii) the
directors breached their fiduciary duties by failing to monitor Ms. Stewart's
affairs to ensure she did not harm the Company; (iii) Ms. Stewart and the other
directors breached their fiduciary duties by failing to address the impropriety
of the Company's payment of split dollar insurance premiums; and (iv) Ms.
Stewart and Mr. Doerr usurped corporate opportunities by selling
personally-owned Company stock to an investment firm without first presenting
the Company with the opportunity to sell its stock to the firm. The plaintiffs
in the Shareholder Derivative Litigation also allege that Ms. Stewart breached
the terms of her employment agreement with the Company. The plaintiff in
Richards further alleges (i) intentional breach of fiduciary duty by, among
other things, acting in reckless disregard of, and failing to prevent, Ms.
Stewart's insider trading in ImClone stock, violating federal securities laws by
selling Company stock while in possession of material, non-public information,
misuse of corporate information, and gross mismanagement of the Company; (ii)
negligent breach of fiduciary duty; (iii) abuse of control; (iv) constructive
fraud; (v) gross mismanagement; and (vi) waste. The plaintiff in Sargent further
alleges that the directors breached their fiduciary duties by failing to take
appropriate action to address Stewart's wrongdoing.
The derivative actions seek damages in favor of the Company, attorneys' fees and
costs, and further relief as determined by the court. Certain of the complaints
also seek declaratory relief. The plaintiffs in the Shareholder Derivative
Litigation and Sargent further seek the creation of a committee or other
administrative mechanism to address the alleged "corporate governance" issues
raised in the complaints and to protect the Company's "cornerstone assets." The
plaintiff in Richards further seeks injunctive relief in the form of attachment
or other restriction of the proceeds of defendants' trading activities or other
assets.
On May 19, 2003, the Company's motion to dismiss the Consolidated Class Action
Complaint was denied, and discovery in that action is ongoing. On April, 17,
2003, the Company's motion to dismiss the Shareholder Derivative Litigation was
granted to the extent that the action has been stayed pending plaintiffs'
submission of a demand to initiate litigation on the Company's Board or a
determination in the Acosta action that such a demand is excused. The plaintiffs
in the Sargent and Acosta actions have indicated their intent to consolidate
their complaints into a single consolidated derivative complaint. The Company
has moved to dismiss the Beam complaint, and a decision on that motion is
pending. The Richards action has been stayed pending resolution of the Beam
motion to dismiss.
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While still in their early stages, we believe the Company has substantial
defenses to these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our 2003 Annual Meeting of Stockholders on June 3, 2003.
(b) The following matter was acted upon at the meeting by holders of
Class A Common Stock and Class B Common Stock voting as one class for
the election of directors to hold office until our next annual meeting.
The vote on this matter was as follows:
BROKER
FOR VOTE WITHHELD NON-VOTES
----------- ------------- ---------
Arthur C. Martinez 317,423,946 181,552 0
Darla D. Moore 317,476,579 128,919 0
Sharon L. Patrick 317,481,833 123,665 0
Naomi O. Seligman 317,476,051 129,447 0
Martha Stewart 317,451,868 153,630 0
Jeffrey W. Ubben 317,431,078 174,420 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Title
- ------- -----------------------------------------------------------------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
(b) Reports on Form 8-K
On August 11, 2003, the Company filed a Current Report on Form 8-K
reporting its earnings for its fiscal second quarter ended June 30,
2003.
On August 13, 2003, the Company filed a Current Report on Form 8-K
providing a transcript of its second quarter earnings conference call
held on August 11, 2003.
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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: August 13, 2003 By: /s/ James Follo
--------------------------------------
Name: James Follo
Title: Executive Vice President, Chief Financial
Officer
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