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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 September 30, 2004
Commission file number 001-15395
Martha Stewart Living Omnimedia, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2187059
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11 West 42nd Street, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 827-8000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 5, 2004
Class A, $0.01 par value 20,665,381
Class B, $0.01 par value 29,422,860
----------
Total 50,088,241
==========
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
Page
Part I. Financial information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Item 4. Controls and Procedures 28
Part II. Other Information
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
September 30, December 31,
2004 2003
------------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 112,306 $ 165,566
Short-term investments 38,891 3,100
Accounts receivable, net 15,233 39,758
Inventories, net 8,093 7,485
Deferred television production costs 25 3,465
Income taxes receivable 533 5,658
Deferred income taxes 1,270 5,024
Other current assets 2,947 4,422
--------- ----------
TOTAL CURRENT ASSETS 179,298 234,478
--------- ----------
PROPERTY, PLANT AND EQUIPMENT, net 18,593 22,673
INTANGIBLE ASSETS, net 54,263 44,257
DEFERRED INCOME TAXES 3,224 3,224
OTHER NONCURRENT ASSETS 6,844 4,470
--------- ----------
TOTAL ASSETS $ 262,222 $ 309,102
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 26,180 26,628
Accrued payroll and related costs 10,761 10,360
Income taxes payable 1,029 167
Current portion of deferred subscription income 23,845 23,833
--------- ----------
TOTAL CURRENT LIABILITIES 61,815 60,988
DEFERRED SUBSCRIPTION INCOME 8,342 7,133
OTHER NONCURRENT LIABILITIES 4,227 4,316
--------- ----------
TOTAL LIABILITIES 74,384 72,437
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares authorized; 20,378
and 19,628 shares outstanding in 2004 and 2003, respectively 204 196
Class B common stock, $.01 par value, 150,000 shares
authorized; 29,423 and 30,059 outstanding in 2004 and 2003,
respectively 294 301
Capital in excess of par value 186,879 183,744
Unamortized restricted stock - (307)
Retained earnings 1,236 53,506
--------- ----------
186,613 237,440
Less: Class A treasury stock - 59 shares at cost (775) (775)
--------- ----------
TOTAL SHAREHOLDERS' EQUITY 187,838 236,665
--------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 262,222 $ 309,102
========= ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2004 2003
(as restated see (as restated see (as restated see
2004 note 2) note 2) note 2)
-------- ---------------- ---------------- -----------------
REVENUES
Publishing $ 22,273 $ 29,147 $ 69,905 $ 102,825
Television 2,203 6,579 9,436 19,782
Merchandising 8,014 8,852 29,706 30.943
Internet/Direct Commerce 6,201 6,602 18,179 21,436
-------- -------- --------- ---------
TOTAL REVENUES 38,691 51,180 127,226 174,986
-------- -------- --------- ---------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 27,405 31,442 86,757 102,492
Selling and promotion 12,472 11,867 38,845 34,714
General and administrative 12,310 12,124 43,696 39,959
Amortization of non-cash stock compensation
expense 991 143 3,471 410
Depreciation and amortization 1,667 1,885 4,976 6,080
-------- -------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES 54,845 57,461 177,745 183,655
-------- -------- --------- ---------
OPERATING LOSS (16,154) (6,281) (50,519) (8,669)
Interest income, net 511 293 1,192 1,090
-------- -------- --------- ---------
LOSS BEFORE INCOME TAXES (15,643) (5,988) (49,327) (7,579)
Income tax benefit (provision) 806 2,172 (2,526) 3,080
-------- -------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM
DISCONTINUED OPERATIONS (14,837) (3,816) (51,853) (4,499)
Loss from discontinued operations, net of tax
benefit (129) (122) (417) (644)
-------- -------- --------- ---------
NET LOSS $(14,966) $ (3,938) $ (52,270) $ (5,143)
======== ======== ========= =========
LOSS PER SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.30) $ (0.08) $ (1.05) $ (0.09)
-------- -------- --------- ---------
Loss from discontinued operations (0.00) (0.00) (0.01) (0.01)
-------- -------- --------- ---------
Net loss $ (0.30) $ (0.08) $ (1.05) $ (0.10)
-------- -------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND
DILUTED 49,698 49,537 49,578 49,553
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
Martha Stewart Living Omnimedia, Inc.
Consolidated Statement of Shareholders' Equity
For the Nine Months Ended September 30, 2004
(unaudited, in thousands)
Capital
in
Class A Common Class B Common Excess Unamortized Class A
Stock Stock of Par Restricted Retained Treasury stock
Shares Amount Shares Amount Value Stock Earnings Shares Amount Total
---------------------------------------------------------------------------------------------------------------
Balance at
January 1, 2004 19,628 $196 30,059 $301 $183,744 $ (307) $ 53,506 (59) $(775) $ 236,665
Net loss for the
period - - - - - - (52,270) - - (52,270
Conversion of
shares 486 5 (486) (5) - - - - - -
Issuance of
shares for
stock option
exercises 279 3 - - 593 - - - - 596
Shares returned
on a net
treasury basis - - (150) (2) 2 - - - - -
Return of
restricted stock (15) - - - (102) 102 - - - -
Amortization of
restricted stock - - - - 2,642 205 - - - 2,847
-----------------------------------------------------------------------------------------------------------------
Balance at
September 30,
2004 20,378 $204 29,423 $294 $186,879 $ - $ 1,236 (59) $(775) $ 187,838
=================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended
September 30,
---------------------------------
2004 2003
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (52,270) $ (5,143)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,976 6,080
Amortization of restricted stock units and restricted stock 3,471 410
Deferred income tax expense 3,754 -
Changes in operating assets and liabilities 29,206 (4,070)
---------- --------
NET CASH USED IN OPERATING ACTIVITIES (10,863) (2,723)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (810) (1,008)
Purchases of short-term investments (36,291) -
Sales of short-term investments 500 13,556
Acquisitions of businesses, net of cash acquired (6,392) -
---------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (42,993) 12,548
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from stock option exercises 596 177
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 596 177
---------- --------
NET INCREASE (DECREASE) IN CASH (53,260) 10,002
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,566 131,664
---------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $112,306 $141,666
========== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data)
1. Accounting policies
a. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein
referred to as the "Company."
The information included in the foregoing interim condensed consolidated
financial statements is unaudited. In the opinion of management, all adjustments
which are of a normal recurring nature and necessary for a fair presentation of
the results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year. These condensed
consolidated financial statements are unaudited and should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
with respect to its fiscal year ended December 31, 2003.
b. Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Management
does not expect such differences to have a material effect on the Company's
consolidated financial statements.
c. Intangible Assets
Commencing January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible
Assets." Under SFAS 142, goodwill is no longer subject to amortization over its
estimated useful life. Rather, goodwill is subject to annual assessment for
impairment by applying a fair-value based test. In August 2004, the Company
acquired certain intangible assets in connection with business acquisitions
discussed in footnote 5. The allocation of the acquisition purchase price is
preliminary. The Company will finalize the purchase price allocation of the fair
value of net assets acquired based upon receipt of a pending asset appraisal.
The components of intangible assets are as follows:
Accumulated Accumulated
amortization amortization
Publishing -publishing Subscriber -subscriber
goodwill goodwill lists lists Total
--------------------------------------------------------------------------------
Balance at January 1, 2004 $59,009 $(14,752) - - $44,257
Acquisitions of businesses 9,482 - 606 10,088
Amortization expense (82) (82)
--------------------------------------------------------------------------------
Balance at September 30, 2004 $68,491 $(14,752) $606 $(82) $54,263
================================================================================
7
d. Income taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS 109,
deferred assets and liabilities are recognized for the future costs and benefits
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The Company
periodically reviews the requirements for a valuation allowance and makes
adjustments to such allowances when changes in circumstances result in changes
in management's judgment about the future realization of deferred tax assets.
The Company has used carryback income to realize net deferred tax assets. Since
the amounts and extent of the Company's future earnings are not determinable
with a sufficient degree of probability to recognize the deferred tax assets in
accordance with the requirements of SFAS 109, the Company has established a
valuation allowance of $21,915 in the first nine months of 2004. The Company
intends to maintain a valuation allowance until evidence would support the
conclusion that it is more likely than not that the deferred tax asset could be
realized. The Company has reached final settlement with the Internal Revenue
Service ("IRS") related to the 1999 audit of the Company's consolidated federal
income tax return. Resolution of the examination did not have a material effect
on our consolidated financial position, results of operations, or liquidity. The
Company currently has recorded an accrual of $0.6 million as of September 30,
2004 for income tax liabilities related to ongoing federal, state, and local
audits.
e. Reclassifications
Certain prior year financial information has been reclassified to conform with
fiscal 2004 financial statement presentation.
f. Stock Compensation
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation," the Company has elected to continue
accounting for employee stock compensation under the APB 25 rules, but disclose
pro forma results using SFAS No. 123's alternative accounting treatment, which
calculates the total compensation expense to be recognized as the fair value of
the award at the date of grant. The fair values of options granted were
estimated on the grant date using the Black-Scholes option pricing model, using
the following assumptions for the three month periods ended September 30,:
2004 2003
------ ------
risk-free interest rates 2.73% 3.60%
dividend yields Zero Zero
expected volatility 153% 140%
expected option life 3 years 6 years
average fair market value per option granted $ 8.72 $ 7.38
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options over the relevant vesting periods. The pro
forma effect on net loss, as reported for the three and nine month periods ended
September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------- -------- --------- --------
Net loss, as reported $(14,966) $ (3,938) $ (52,270) $ (5,143)
-------- -------- --------- --------
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,050) (2,535) (1,527) (7,594)
-------- -------- --------- --------
8
Pro forma net loss $(16,016) $(7,900) $ (53,797) $ (17,010)
======== ======== ========= ==========
Loss per share:
Basic and diluted - as reported $ (0.30) $ (0.08) $ (1.05) $ (0.10)
Basic and diluted - pro forma $ (0.32) $ (0.13) $ (1.09) $ (0.26)
2. Restatement Relating to Interim Subscription Acquisition Costs.
The Company has recently determined the need to adjust the recognition of
expense related to subscription acquisition costs. The Company previously
recognized as expense its estimate of annual subscription-acquisition costs
ratably throughout the year. The Company changed its expense recognition
practice and will now recognize subscription-acquisition costs in the period in
which the acquisition efforts take place and has restated the financial
statements included in this filing accordingly. The change in accounting policy
has no impact on full-year results of operations or earnings (loss) per share.
Following are the changes presented in tabular format for the prior year period.
Current year amounts have been presented using the revised methodology.
Three Months
Ended September 30, 2003
---------------------------------------------
As reported** Adjustment Restated
---------------------------------------------
INCOME STATEMENT
Selling and promotion $ 11,766 $ 101 $ 11,867
Operating loss (6,180) (101) (6,281)
Income tax benefit 2,169 3 2,172
Net loss (3,840) (98) (3,938)
Loss per share $ (0.08) $ (0.00) $ (0.08)
Nine Months
Ended September 30, 2003
---------------------------------------------
As reported** Adjustment Restated
---------------------------------------------
INCOME STATEMENT
Selling and promotion 38,259 (3,545) $ 34,714
Operating income (loss) (12,214) 3,545 (8,669)
Income tax benefit (provision) 4,353 (1,273) 3,080
Net income (loss) (7,415) 2,272 (5,143)
Income (loss) per share (0.15) 0.05 $ (0.10)
Three Months
Ended December 30, 2003
---------------------------------------------
As reported Adjustment Restated
---------------------------------------------
INCOME STATEMENT
Selling and promotion $ 13,388 $ 3,545 $ 16,933
Operating income (loss) 5,809 (3,545) 2,264
Income tax benefit (provision) (1,310) 1,273 (37)
Net income (loss) 4,644 (2,272) 2,372
Income (loss) per share $ 0.09 $ (0.05) $ 0.05
3. Inventories
The components of inventories are as follows:
- ------------
** Certain prior year financial information has been reclassified to conform
with fiscal 2004 financial statement presentation.
9
September 30, December 31,
2004 2003
------------- ------------
Paper $5,498 $ 4,610
Product merchandise 4,048 4,801
------ -------
9,546 9,411
Less: reserve for obsolete and
excess inventory 1,453 1,926
------ -------
$8,093 $ 7,485
====== =======
4. Loss per share
Loss per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic loss per share is calculated by dividing net loss by the
weighted-average number of common shares outstanding during each period. Diluted
loss per share includes the determinants of basic loss per share and, in
addition, gives effect to potentially dilutive common shares. For the three and
nine month periods ended September 30, 2004 and 2003, the following options were
excluded from the calculation of loss per share as their inclusion would be
antidilutive:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
2004 2003 2004 2003
------- --------- ------- ---------
Options and restricted stock excluded 412,060 4,282,918 462,573 4,154,139
------- --------- ------- ---------
5. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business segments are
Publishing, Television, Merchandising and Internet/Direct Commerce. The
Publishing segment primarily consists of the Company's magazine operations, and
also those related to its book operations. The Television segment consists of
the Company's television production operations that produce television
programming that airs in syndication and on cable. The Merchandising segment
consists of the Company's operations related to the design of merchandise and
related promotional and packaging materials that are distributed by its retail
and manufacturing partners in exchange for royalty income. The Internet/Direct
Commerce segment comprises the Company's operations relating to its catalog,
Martha Stewart: The Catalog For Living, which will be discontinued by year-end
2004, its direct-to-consumer floral business and the website marthastewart.com.
The Company believes operating income before depreciation and amortization,
including the amortization of non-cash stock compensation, ("OIDA") is an
appropriate measure when evaluating the operating performance of its business
segments and the Company on a consolidated basis. OIDA is used externally by the
Company's investors, analysts, and industry peers. OIDA is among the primary
metrics used by management for planning and forecasting of future periods, and
is considered an important indicator of the operational strength of the
Company's businesses. The Company believes the presentation of this measure is
relevant and useful for investors because it allows investors to view
performance in a manner similar to the method used by the Company's management
and makes it easier to compare the Company's results with other companies that
have different capital structures or tax rates. The Company believes OIDA should
be considered in addition to, not as a substitute for, operating income (loss),
net income (loss), cash flows, and other measures of financial performance
prepared in accordance with generally accepted accounting principles ("GAAP").
As OIDA is not a measure of performance calculated in accordance with GAAP, this
measure may not be comparable to similarly titled measures employed by other
companies.
10
Revenues for each segment are presented in the condensed consolidated statements
of income. Income (loss) from operations for each segment were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
--------------------- ---------------------
2004 2003(a) 2004 2003(a)
--------- -------- --------- --------
OPERATING INCOME (LOSS)
Publishing $ (5,577) $ 1,294 $ (13,278) $ 19,247
Television (1,822) (33) (7,300) 196
Merchandising 4,805 4,563 16,608 19,405
Internet/Direct Commerce (2,685) (1,970) (7,790) (14,774)
--------- -------- --------- --------
Operating Income (Loss) before Corporate Overhead (5,279) 3,854 (11,760) 24,074
Corporate Overhead (10,875) (10,135) (38,759) (32,743)
--------- -------- --------- --------
TOTAL OPERATING LOSS (16,154) (6,281) (50,519) (8,669)
--------- -------- --------- --------
DEPRECIATION AND AMORTIZATION
Publishing 146 41 269 123
Television 57 236 173 1,015
Merchandising 190 166 570 503
Internet/Direct Commerce 248 235 740 726
Corporate Overhead 1,026 1,207 3,224 3,713
--------- -------- --------- --------
TOTAL DEPRECIATION AND AMORTIZATION 1,667 1,885 4,976 6,080
--------- -------- --------- --------
AMORTIZATION OF NON-CASH STOCK COMPENSATION EXPENSE (BENEFIT)
Publishing 27 50 129 152
Merchandising (97) 13 (72) 38
Internet/Direct Commerce - 1 - (21)
Corporate Overhead 1,061 79 3,414 241
--------- -------- --------- --------
TOTAL AMORTIZATION OF NON-CASH STOCK COMPENSATION EXPENSE 991 143 3,471 410
--------- -------- --------- --------
OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION AND AMORTIZATION
OF NON-CASH STOCK COMPENSATION
Publishing (5,404) 1,385 (12,880) 19,522
Television (1,765) 203 (7,127) 1,211
Merchandising 4,898 4,742 17,106 19,946
Internet/Direct Commerce (2,437) (1,734) (7,050) (14,069)
--------- -------- --------- --------
Operating Income (Loss) before Depreciation and Amortization and
Amortization of Non-Cash Stock Compensation and before Corporate
Overhead (4,708) 4,596 (9,951) 26,610
Corporate Overhead ( 8,788) (8,849) (32,121) (28,789)
--------- -------- --------- --------
TOTAL OPERATING LOSS BEFORE DEPRECIATION AND AMORTIZATION AND AMORTIZATION OF
NON-CASH STOCK COMPENSATION $ (13,496) $ (4,253) $ (42,072) $ (2,179)
========= ======== ========= ========
(a) As restated, see note 2.
11
6. Business Acquisitions
In August 2004, the Company acquired certain assets and liabilities of Body &
Soul magazine and Dr. Andrew Weil's Self Healing newsletter, which are
publications featuring "natural living" content. The primary purpose of the
acquisition was to enter a new market and to launch "natural living " as a new
"omni" lifestyle category and brand for the Company. Consistent with SFAS No.
141, "Business Combinations," the acquisitions were accounted for under purchase
accounting.
In connection with the acquisition of the Body & Soul net assets, the Company
recorded tangible assets of $0.6 million, an intangible subscriber list of $0.2
million, and liabilities assumed of $2.6 million based on estimated fair values
as determined by management utilizing information available at this time.
Goodwill of $6.5 million was recognized as the excess of the purchase price over
the preliminary estimate of fair market value of assets acquired.
In connection with the acquisition of Dr. Andrew Weil's Self Healing newsletter
net assets, the Company recorded tangible assets of $0.4 million, an intangible
subscriber list of $0.4 million, and liabilities assumed of $2.0 million based
on estimated fair values as determined by management utilizing information
available at this time. Goodwill of $3.0 million was recognized as the excess of
the purchase price over the preliminary estimate of fair market value of assets
acquired.
The intangible subscriber lists are subject to a twelve month amortization
period. For both the three and nine month periods ended September 30, 2004
approximately $0.1 million was charged to amortization expense and accumulated
amortization.
For each acquisition, the Company will finalize the purchase price allocation of
the fair value of net assets acquired based upon receipt of a pending asset
appraisal.
Unaudited pro forma information related to these acquisitions is not included,
since the impacts of these transactions are not material to the consolidated
results of the Company.
7. Employee Benefit Plan
During 2003, the Company adopted the 2003 Key Executive Bonus Plan. Under the
plan, the Company has made and will continue to make periodic cash payments to
certain executives who remain employed by the Company. The plan expires on
December 31, 2004 and the remaining payments under the plan will be paid shortly
thereafter. The Company is recognizing the expected total expense of the plan
ratably over the term of the plan.
The following summarizes the expense recognized related to the plan:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------------
2004 2003 2004 2003
------ ---- ------- -----
Amount recognized as expense, including in
general and administrative $ 713 $ - $ 2,368 $ -
------ ---- ------- -----
The Company expects to recognize an additional expense of approximately $0.7
during the three month period ended December 31, 2004 related to the plan.
In July 2004, $1.9 million was paid under the plan and the Company expects to
pay up to $1.7 million in January 2005, representing the remaining amount due
under the plan.
8. Related Party Transaction
Martha Stewart has submitted a claim, pursuant to the Corporation's By-laws, for
approximately $3.7 million, for reimbursement of certain legal expenses relating
to her defense of the count of the federal criminal complaint against her
alleging she made false and misleading statements intended to influence the
price of the Corporation's stock.
12
Ms. Stewart's defense of this count was successful and a judgment of acquittal
was entered in her favor. The Corporation and Ms. Stewart have agreed in
principle to submit the question of whether or not she is entitled to
indemnification to an independent expert on Delaware law. If the independent
expert determines that Ms. Stewart is entitled to indemnification, the
Corporation believes that the amount reimbursed to Ms. Stewart would be
reimbursable to the Corporation under its Directors & Officers insurance policy
and, accordingly, does not believe that the claim will result in an expense to
the Corporation.
9. Discontinued Operations
In June 2002, the Company decided to exit The Wedding List, a wedding registry
and gift business that was reported within the Internet/Direct Commerce business
segment. All prior period financial statements were restated to report the
operations as a discontinued operation.
Summary operating results for The Wedding List were as follows:
Three Months Ended Nine Months Ended
September 30, (unaudited) September 30, (unaudited)
-------------------------- --------------------------
2004 2003 2004 2003
------ ------ ------ ------
Revenues $ - $ (55) $ - $ 526
Loss from operations, including restructuring
and shutdown costs, before income tax benefit
in 2003 (129) (202) (417) (1,006)
Income tax benefit - 80 - 362
Loss from discontinued operations, net of
income tax benefit in 2003 $ (129) $ (122) $ (417) $ (644)
10. Supplemental cash flow information:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
-------- ------ -------- ------
Cash paid (refunded) for income taxes $ (6,993) - $ (6,978) $1,529
Cash paid for interest was immaterial in the periods presented.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart
Living Omnimedia, Inc., and its subsidiaries.
EXECUTIVE SUMMARY
TRENDS, RISKS AND UNCERTAINTIES
Since June 2002, public disclosure of various governmental investigations into
Martha Stewart's sale of non-Company stock and of the criminal and civil charges
against Ms. Stewart arising out of the investigations has generated a great deal
of negative publicity surrounding Ms. Stewart. Because our principal brand and
several brand labels are closely associated with the name Martha Stewart, we
have seen, since June 2002, substantial negative impacts on our business as a
result of the uncertainty surrounding the resolution of these legal proceedings
and resulting negative publicity. Although difficult to quantify with any
precision, we believe that the uncertainty and publicity surrounding these
matters contributed substantially to the adverse trends our business has
experienced since June 2002.
On June 4, 2003, a federal grand jury in the United States District Court for
the Southern District of New York indicted Ms. Stewart, then the Company's
Chairman and Chief Executive Officer, on charges of obstruction of an agency
proceeding, making false statements to federal investigators, conspiracy, and
securities fraud. That same day, the Securities and Exchange Commission ("SEC")
filed a civil complaint against Ms. Stewart, in the United States District Court
for the Southern District of New York, alleging violations of federal securities
law. On July 10, 2003, the SEC action was stayed until further order of the
court. Following the indictment, Ms. Stewart resigned her positions as Chairman
and Chief Executive Officer, but retained her roles as a director and the
Company's Chief Creative Officer. A new Chairman and CEO assumed those
positions.
On March 5, 2004, Martha Stewart was found guilty of conspiracy, obstruction of
an agency proceeding, and making false statements to federal investigators
concerning her personal sale of non-Company stock. On March 15, 2004, Ms.
Stewart resigned her positions as a director and Chief Creative Officer of the
Company, and assumed the position of Founding Editorial Director, a non-officer
position. On July 16, 2004, Ms. Stewart was sentenced to five months in prison
and two years of supervised release, which includes five months of home
confinement to be served immediately upon release from prison. Ms. Stewart began
serving her sentence on October 8, 2004.
The Company continues to evaluate the impact of these events on its employees,
the responses of customers, advertisers, and business partners in order to asses
the potential effect on the Company's operating assets and make appropriate
decisions with respect to the Company's business operations and strategy. In
light of the results of this assessment, the Company has already implemented a
number of business initiatives and may consider a broad range of additional
business initiatives and strategic alternatives. These may include, without
limitation, changes in core content areas, new business initiatives, development
of new expert personalities, disposition of certain products, assets and
businesses, as well as certain other business efficiencies.
Although we are unable to predict the full effect of the outcome of Ms.
Stewart's trial and related sentencing on our business, we continue to
experience declines in advertising revenues since the trial outcome, principally
in our publishing segment. We may experience further material adverse impacts as
a result of the trial outcome, including, without limitation, additional revenue
declines, additional expenses relating to corporate communications and corporate
professional fees and loss of key personnel. For the nine month period ended
September 30, 2004, we suffered a net loss of $52.3 million compared to a net
loss of $5.1 million in the same period of the prior year. We may sustain
substantial operating losses in future periods and our cash position may be
materially adversely affected. However, we are now becoming more optimistic
regarding a print based advertising recovery, beginning in the second quarter of
2005.
The operations of our television segment have been dramatically reduced in 2004.
The segment now primarily consists of a cable television distribution agreement
with The Style Network, a weekly syndicated program - Petkeeping with Marc
Marrone and beginning in January 2005 a weekly show airing on PBS stations
nationwide. Previously, the segment included our nationally syndicated daily
show, Martha Stewart Living, as well as several other cable television shows.
Given the change in operations, we expect to report continued losses in the
Television
14
segment in the fourth quarter of 2004. In September 2004 we entered into
agreements with Mark Burnett, a well regarded producer of prime-time
programming, and an affiliated entity under which Mr. Burnett will advise and
consult with the company regarding various television matters, including
developing opportunities to evolve the future Martha Stewart Living daily
syndicated television show and relating to the development and production of a
primetime network television series to feature Martha Stewart. In connection
with the consulting agreement, MSO issued to Mr. Burnett a warrant to purchase
up to 2.5 million shares of MSO's Class A Common Stock at an exercise price of
$12.59 per share. The warrant will vest and become exercisable in tranches,
subject to the achievement of various milestones relating to the broadcast of a
primetime network television series and production of a new series of Martha
Stewart Living or a successor program. We currently expect to begin to recognize
as an expense, a portion of the 2.5 million shares in September 2005, when
certain programs are expected to air.
On April 22, 2004, we reached an agreement with Kmart to amend the terms of our
contract and executed certain releases with respect to a legal action Kmart
filed against the Company on February 11, 2004. We believe that this agreement
better aligns the two companies' mutual business interests. In connection with
the amendment and releases, on April 23, 2004, Kmart voluntarily dismissed its
complaint with prejudice, terminating the litigation. The amendment, among other
things, extends the Kmart contract for an additional two years and expands the
scope of the contract to cover several new product categories. At the same time,
the amendment eliminates, with respect to 2003 and subsequent years, provisions
of the contract providing for payment of guaranteed minimum royalties by
individual product category and reduces the amount Kmart is obligated under the
contract to spend with MSO on advertising in MSO media properties. The amendment
also reduces the aggregate minimum royalty payments. The aggregate minimum
royalty payment for the period February 1, 2004 to January 31, 2005 was reduced
to $49.0 million from $53.4 million previously. We continue to expect that the
minimum guaranteed royalty payments will exceed actual royalties earned from
retail sales through January 31, 2008. For the contract years ending January 31,
2009 and 2010 (the extension years), the minimum guarantees will be
substantially lower than in prior years. The specific computation is discussed
in the paragraph below.
The following table sets forth the minimum guarantees as contained in our
contract with Kmart Corporation. ($ in millions)
1/31/02 1/31/03 1/31/04 1/31/05 1/31/06 1/31/07 1/31/08
Minimum Royalty Amounts $ 15.3 $ 40.4 $ 47.5 $ 49.0 $ 54.0 $ 59.0 $ 65.0
Furthermore, for the year ending January 31, 2009 the minimum royalty amount is
the greater of $20 million or 50% of the earned royalty for the year ending
January 31, 2008. For the year ending January 31, 2010 the minimum royalty
amount is the greater of $15 million or 50% of the earned royalty for the year
ending January 31, 2009. Furthermore, $3.8 million of the January 31, 2005 and
January 31, 2006 minimum royalty payments and $2.5 million of the January 31,
2007 and January 31, 2008 minimum royalty payments, but not more than $10.0 in
the aggregate over the term of the agreement, will be deferred and subject to
recoupment in the periods ending January 31, 2009 and January 31, 2010.
In August 2004, we decided to discontinue the Catalog for Living and its online
product offerings, which is included in the Internet/ Direct Commerce segment,
by year-end 2004. This will result in lower revenues in this segment beginning
in 2005, a reduction in operating expenses and therefore a lower operating loss
in the segment. We do not expect any significant charges to operating results in
the future due to the discontinuance of our commerce operations in this segment.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart
Living Omnimedia, Inc., and its subsidiaries.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
PUBLISHING SEGMENT
2003
(unaudited,as
2004 restated see
(unaudited) note 8) Variance
----------- ------------- ---------
PUBLISHING REVENUE
Advertising $ 7,501 $ 15,582 $ (8,081)
Circulation 14,335 13,724 611
Other 437 (159) 596
----------- ------------- ---------
TOTAL PUBLISHING SEGMENT REVENUE 22,273 29,147 (6,874)
----------- ------------- ---------
PUBLISHING OPERATING COSTS AND EXPENSES
Production, distribution and editorial 15,343 16,687 1,344
Selling and promotion 11,677 10,743 (934)
General and administrative 657 332 (325)
Amortization of non-cash compensation expense 27 50 23
Depreciation and amortization 146 41 (105)
----------- ------------- ---------
TOTAL PUBLISHING OPERATING COSTS AND EXPENSES 27,850 27,853 3
----------- ------------- ---------
OPERATING INCOME (LOSS) $ (5,577) $ 1,294 $ (6,871)
----------- ------------- ---------
Publishing revenues decreased $6.9 million, or 23.6%, to $22.3 million for the
three months ended September 30, 2004, from $29.1 million for the three months
ended September 30, 2003. This decrease was primarily due to a decrease in
advertising revenues of $8.1 million. The decrease in advertising revenue
resulted primarily from fewer advertising pages in Martha Stewart Living, as
well as a reduction in the advertising page rate, due in part to the rate base
(the number of copies per issue we guarantee to advertisers) reduction which
became effective commensurate with the January 2004 issue. The decrease in
advertising revenue in Martha Stewart Living magazine was $9.4 million. This
decrease in advertising revenue was partially offset by an increase in
advertising revenue in our Special Interest Publications ("SIP") which was due
in part to an increase in frequency in the quarter (presented in the table
below). Advertising revenue in the quarter also benefited from the inclusion of
two issues of Body & Soul magazine, which we acquired in August 2004.
Circulation revenue increased in the quarter, with higher circulation revenues
from Everyday Food and an increase in frequency of our SIP's, as well as the
benefit of the acquisition of Body & Soul magazine and The Dr. Weil Self Healing
newsletter, partially offset by lower revenue from Martha Stewart Living.
Magazine Publication Schedule
Third Quarter 2004 Third Quarter 2003
- ---------------------------------------------------------------------------------------------------------------
Martha Stewart Living Three Issues Three Issues
Martha Stewart Weddings No Issue No Issue
Everyday Food Two Issues Two Issues
Special Interest Publications Three Issues One Issue
Body & Soul (a) Two Issues n/a
16
(a) Acquired in August 2004 and therefore was not included in prior
periods.
Production, distribution and editorial expenses decreased $1.3 million primarily
reflecting lower paper, printing and distribution costs of Martha Stewart Living
magazine, due primarily to a lower number of pages printed per issue and lower
circulation, partially offset by the additional costs associated with the
publication of additional SIP's and the acquisition referred to above. Selling
and promotion expenses increased $0.9 million primarily due to higher
circulation acquisition costs relating to Everyday Food, our recent marketing
campaign and the recent acquisition.
TELEVISION SEGMENT
2004 2003
(unaudited) (unaudited) Variance
----------- ----------- --------
TELEVISION REVENUE
Syndication $ 1,384 $ 4,746 $ (3,362)
Licensing and other 819 1,833 (1,014)
----------- ----------- --------
TOTAL TELEVISION SEGMENT REVENUE 2,203 6,579 (4,376)
----------- ----------- --------
TELEVISION OPERATING COSTS AND EXPENSES
Production, distribution and editorial 3,036 4,985 1,949
Selling and promotion 125 475 350
General and administrative 807 916 109
Depreciation and amortization 57 236 179
----------- ----------- --------
TOTAL TELEVISION OPERATING COSTS AND EXPENSES 4,025 6,612 2,587
----------- ----------- --------
OPERATING INCOME (LOSS) $ (1,822) $ (33) $ (1,789)
----------- ----------- --------
Television revenues decreased $4.4 million, or 66.5%, to $2.2 million for the
quarter ended September 30, 2004, from $6.6 million for the quarter ended
September 30, 2003, primarily due to lower revenue from our syndicated daily
program which ceased airing in mid September. The ending of the show will
negatively impact revenue in future periods. The segment was also impacted by
the expiration of certain cable and international licensing contracts effective
December 31, 2003. Future quarters will be adversely impacted by the recent
termination of our contract with the Food Network. Revenue in the quarter
benefited from the June launch of our programming on The Style Network, and the
September 2003 launch of our half-hour syndicated program, Petkeeping with Marc
Maronne.
Production, distribution and editorial expenses as well as selling and promotion
expenses decreased in the period due to the cessation of production of our
nationally syndicated daily show, Martha Stewart Living. Depreciation and
amortization decreased $0.2 million primarily due to a reduction in the net
carrying value of certain assets in our Connecticut television studio in the
fourth quarter of 2003.
17
MERCHANDISING SEGMENT
2004 2003
(unaudited) (unaudited) Variance
----------- ----------- --------
MERCHANDISING REVENUE
Kmart earned royalty $ 6,849 $ 7,161 $ (312)
Other 1,165 1,691 (526)
----------- ----------- --------
TOTAL MERCHANDISING SEGMENT REVENUE 8,014 8,852 (838)
----------- ----------- --------
MERCHANDISING OPERATING COSTS AND EXPENSES
Production, distribution and editorial 1,711 2,862 1,151
Selling and promotion 197 147 (50)
General and administrative 1,208 1,101 (107)
Amortization of non-cash compensation expense (97) 13 110
Depreciation and amortization 190 166 (24)
----------- ----------- --------
TOTAL MERCHANDISING OPERATING COSTS AND EXPENSES 3,209 4,289 1,080
----------- ----------- --------
OPERATING INCOME $ 4,805 $ 4,563 $ 242
----------- ----------- --------
Merchandising revenues decreased $0.8 million, or 9.5%, to $8.0 million for the
quarter ended September 30, 2004, from $8.9 million for the quarter ended
September 30, 2003, primarily due to lower sales of our Martha Stewart Everyday
product at Kmart due to lower same-store-sales. The revenue decline was
partially offset by an increase in the royalty rate on a year-over-year basis.
The royalty rate under our agreement with Kmart increased 5% on February 1,
2004. Royalty revenue from Kmart was recorded based on actual sales in the
current and prior year periods. We expect the minimum guarantees will exceed
actual royalties earned from retail sales for the foreseeable future primarily
due to store closings and recent negative trends in same-store sales. Other
revenue declined in the quarter principally due to a decline in royalty revenue
from our Japanese retail partner, partially offset by revenue from our Everyday
program at Sears Canada. Our program at Sears Canada launched in the second half
of 2003.
Production, distribution and editorial expenses decreased $1.1 million in the
period due to lower compensation related expense.
18
INTERNET/DIRECT COMMERCE SEGMENT
2004 2003
(unaudited) (unaudited) Variance
----------- ----------- --------
INTERNET/DIRECT COMMERCE REVENUE
Product $ 5,978 $ 6,350 $ (372)
Other 223 252 (29)
----------- ----------- --------
TOTAL INTERNET/DIRECT COMMERCE SEGMENT REVENUE 6,201 6,602 (401)
----------- ----------- --------
INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES
Production, distribution and editorial 7,223 6,810 (413)
Selling and promotion 447 471 24
General and administrative 968 1,055 87
Amortization of non-cash compensation expense - 1 1
Depreciation and amortization 248 235 (13)
----------- ----------- --------
TOTAL INTERNET/DIRECT COMMERCE OPERATING COSTS AND
EXPENSES 8,886 8,572 (314)
----------- ----------- --------
OPERATING INCOME (LOSS) $ (2,685) $ (1,970) $ (715)
----------- ----------- --------
Internet/Direct Commerce revenues decreased $0.4 million, to $6.2 million for
the three months ended September 30, 2004, from $6.6 million for the three
months ended September 30, 2003, due to lower commerce sales related to our
catalog offerings, partially offset by higher revenue from our
direct-to-consumer floral business. The decline in commerce revenue was
attributable to lower catalog circulation in the period. Given our decision to
discontinue the Catalog for Living and its online product offerings by year-end
2004, we expect to see a further reduction in revenue and a reduced operating
loss in this segment.
Production, distribution and editorial costs increased $0.4 million primarily
due to difficult comparisons with the year-ago period. The prior year period
benefited from the successful disposition of previously written down obsolete
and slow moving inventory which increased gross margins in that period. The
higher costs were partially offset by lower compensation expense due to the
wind-down of the catalog portion of our commerce business.
CORPORATE
2004 2003
(unaudited) (unaudited) Variance
----------- ----------- --------
CORPORATE OPERATING COSTS AND EXPENSES
Production, distribution and editorial $ 92 $ 98 $ 6
Selling and promotion 26 31 5
General and administrative 8,670 8,720 50
Amortization of non-cash compensation expense 1,061 79 (982)
Depreciation and amortization 1,026 1,207 181
----------- ----------- --------
TOTAL CORPORATE OPERATING COSTS AND EXPENSES 10,875 10,135 (740)
----------- ----------- --------
OPERATING LOSS $ (10,875) $ (10,135) $ (740)
----------- ----------- --------
19
General and administrative expenses was essentially flat in the quarter, with
certain changes in compensation, including the cost of additional retention
programs, offsetting other compensation related accounts. The increase in the
amortization of non-cash compensation expense principally relates to the
amortization of the value of restricted stock units granted in connection with a
November 2003 stock option exchange program.
OTHER ITEMS
Income tax benefit for the quarter ended September 30, 2004 was $0.8 million,
compared to an income tax benefit of $2.2 million for the quarter ended
September 30, 2003. The current period provision includes a valuation allowance
of $6.3 million taken against certain deferred tax assets since the amounts and
extent of the Company's future earnings are not determinable with a sufficient
degree of probability.
Loss from discontinued operations. Loss from discontinued operations was $0.1
million for the quarter ended September 30, 2004 compared to $0.1 million for
the quarter ended September 30, 2003. Discontinued operations represent the
operations of the Wedding List, which the Company decided to discontinue in
2002. The current year expenses are primarily facility related.
Net Loss. Net loss was $15.0 million for the quarter ended September 30, 2004,
compared to a net loss of $3.9 million for the quarter ended September 30, 2003,
as a result of the above mentioned factors
20
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004 TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
PUBLISHING SEGMENT
2003
(unaudited,
2004 as restated
(unaudited) see note 8) Variance
---------------- ------------ ----------
PUBLISHING REVENUE
Advertising $ 24,055 $ 59,059 $ (35,004)
Circulation 44,690 42,442 2,248
Other 1,160 1,324 (164)
---------------- ------------ ----------
TOTAL PUBLISHING SEGMENT REVENUE 69,905 102,825 (32,920)
---------------- ------------ ----------
PUBLISHING OPERATING COSTS AND EXPENSES
Production, distribution and editorial 45,761 51,353 5,592
Selling and promotion 35,540 30,150 (5,390)
General and administrative 1,484 1,800 316
Amortization of non-cash compensation expense 129 152 23
Depreciation and amortization 269 123 (146)
---------------- ------------ ----------
TOTAL PUBLISHING OPERATING COSTS AND EXPENSES 83,183 83,578 395
---------------- ------------ ----------
OPERATING INCOME (LOSS) $ (13,278) $ 19,247 $ (32,525)
---------------- ------------ ----------
Publishing revenues decreased $32.9 million, or 32.0%, to $69.9 million for the
nine months ended September 30, 2004, from $102.8 million for the nine months
ended September 30, 2003. This decrease was primarily due to a decrease in
advertising revenues of $35.0 million. The decrease in advertising revenue
resulted primarily from fewer advertising pages in Martha Stewart Living, as
well as a reduction in the advertising page rate, due in part to the rate base
(the number of copies per issue we guarantee to advertisers) reduction which
became effective commensurate with the January 2004 issue. The decrease in
advertising revenue in Martha Stewart Living magazine was $28.4 million. The
reduction in advertising revenue was also attributable to lower advertising
revenue in Everyday Food magazine of $5.2 million, as the prior year's period
included advertising revenues from a sponsorship arrangement and lower revenue
in Martha Stewart Weddings. Circulation revenue increased $2.2 million in the
period primarily due to the increase in circulation and frequency of Everyday
Food, as well as an additional issue of Martha Stewart Weddings published in the
period, as well as two additional SIP's, partially offset by lower circulation
revenue from Martha Stewart Living magazine, due primarily to lower subscription
copies sold in the period. The period also benefited from the acquisition of
Body & Soul magazine and The Dr. Weil Self Healing newsletter.
Magazine Publication Schedule
Nine months ended September 2004 Nine months ended September 2003
- ------------------------------------------------------------------------------------------------------------
Martha Stewart Living Nine Issues Nine Issues
Martha Stewart Weddings Three Issue Two Issue
Everyday Food Eight Issues Six Issues
Special Interest Publications Seven Issues Five Issue
Body & Soul (a) Two Issues n/a
(a) Acquired in August 2004 and therefore was not included in prior periods.
Production, distribution and editorial expenses decreased $5.6 million primarily
reflecting lower paper, printing and distribution costs of Martha Stewart Living
magazine, due primarily to a lower number of pages printed per issue and lower
circulation, partially offset by the additional costs associated with the
publication of additional magazines referred to above. Selling and promotion
expenses increased $5.4 million resulting primarily from higher circulation
21
acquisition costs relating to Everyday Food, one of our Special Interest
Publication's, and the recent acquisition, partially offset by lower spending
related to Martha Stewart Living magazine.
TELEVISION SEGMENT
2004 2003
(unaudited) (unaudited) Variance
---------- ----------- -----------
TELEVISION REVENUE
Syndication $ 7,117 $ 13,978 $ (6,861)
Licensing and other 2,319 5,804 (3,485)
---------- ----------- -----------
TOTAL TELEVISION SEGMENT REVENUE 9,436 19,782 (10,346)
---------- ----------- -----------
TELEVISION OPERATING COSTS AND EXPENSES
Production, distribution and editorial 12,914 14,065 1,151
Selling and promotion 1,023 1,884 861
General and administrative 2,626 2,622 (4)
Amortization of non-cash compensation expense - - -
Depreciation and amortization 173 1,015 842
---------- ----------- -----------
TOTAL TELEVISION OPERATING COSTS AND EXPENSES 16,736 19,586 2,850
---------- ----------- -----------
OPERATING INCOME (LOSS) $ (7,300) $ 196 $ (7,496)
---------- ----------- -----------
Television revenues decreased $10.3 million, or 52.3%, to $9.4 million for the
nine months ended September 30, 2004, from $19.8 million for the nine months
ended September 30, 2003. The decrease is primarily attributable to lower
revenue from our syndicated daily program, Martha Stewart Living, of $7.6
million due primarily to lower license fees and lower advertising revenue. The
decrease was partially offset by revenue from the launch of our programming on
The Style Network and from Petkeeping with Marc Marronne. The segment was also
impacted by the expiration of certain cable and international licensing
contracts effective December 31, 2003, included in licensing above. Future
quarters will be adversely impacted by the recent termination of our contract
with the Food Network.
Production, distribution and editorial expenses decreased $1.2 million in the
period due to lower production costs as a result of the winding down of
production for the syndicated national show as well as a lower distribution fees
associated with the lower license fee revenue from the Martha Stewart Living
show, partially offset by higher non-cash production amortization recognized in
the period, including a $1.5 million write-down of deferred production costs
resulting from the early termination of a cable television licensing agreement.
Selling and promotion expenses decreased $0.9 million due to lower marketing
efforts for the nationally syndicated daily show due in part to the ending of
our daily show on nationally syndicated television. Depreciation and
amortization decreased $0.8 million primarily due to a reduction in the net
carrying value of certain assets in our Connecticut television studio in the
fourth quarter of 2003. The decrease in depreciation will continue into the
fourth quarter.
22
MERCHANDISING SEGMENT
2004 2003
(unaudited) (unaudited) Variance
---------- ----------- -----------
MERCHANDISING REVENUE
Kmart earned royalty $ 22,713 $ 25,703 $ (2,990)
Kmart minimum true-up 2,412 - 2,412
Other 4,581 5,240 (659)
---------- ----------- ----------
TOTAL MERCHANDISING SEGMENT REVENUE 29,706 30,943 (1,237)
---------- ----------- ----------
MERCHANDISING OPERATING COSTS AND EXPENSES
Production, distribution and editorial 6,875 7,571 696
Selling and promotion 767 333 (434)
General and administrative 4,958 3,093 (1,865)
Amortization of non-cash compensation expense (72) 38 110
Depreciation and amortization 570 503 (67)
---------- ----------- ----------
TOTAL MERCHANDISING OPERATING COSTS AND EXPENSES 13,098 11,538 (1,560)
---------- ----------- ----------
OPERATING INCOME $ 16,608 $ 19,405 $ (2,797)
---------- ----------- ----------
Merchandising revenues decreased $1.2 million, or 4.0%, to $29.7 million for the
nine months ended September 30, 2004, from $30.9 million for the nine months
ended September 30, 2003, primarily due to lower product sales at Kmart as a
result of lower same-store-sales as well as Kmart store closings that took place
in the early part of 2003. The revenue decline was partially offset by
recognizing as revenue the pro-rata portion of the contractual minimum royalty
amount due from Kmart for the 12 month period ended January 31, 2004, relating
to January 2004 as well as an increase in the royalty rate on a year-over-year
basis. The royalty rate under our agreement with Kmart increased 5% on February
1, 2004. We expect the minimum guarantees will exceed actual royalties earned
from retail sales for the foreseeable future primarily due to store closings and
recent negative trends in same-store sales. Other revenue declined modestly due
to a decline in creative service revenue, as well as a decline in revenue from
our Japanese retail partner, partially offset by revenue from the launch of our
program at Sears Canada and higher royalty revenue from our Martha Stewart
Signature products. Our program at Sears Canada launched in the second half of
2003.
Production, distribution and editorial expense decreased $0.7 million due to
lower compensation related expenses. Selling and promotion expenses increased
$0.4 million in the period due to higher marketing expenses related to our
Martha Stewart Signature program. General and administrative expense increased
$1.9 million primarily due to higher professional fees.
23
INTERNET/DIRECT COMMERCE SEGMENT
2004 2003
(unaudited) (unaudited) Variance
----------- ----------- --------
INTERNET/DIRECT COMMERCE REVENUE
Product sale $ 17,704 $ 20,431 $ (2,727)
Other 475 1,005 (530)
----------- ----------- --------
TOTAL INTERNET/DIRECT COMMERCE SEGMENT REVENUE 18,179 21,436 (3,257)
----------- ----------- --------
INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES
Production, distribution and editorial 20,930 29,205 8,275
Selling and promotion 1,438 1,639 201
General and administrative 2,861 4,661 1,800
Amortization of non-cash compensation expense - (21) (21)
Depreciation and amortization 740 726 (14)
----------- ----------- --------
TOTAL INTERNET/DIRECT COMMERCE OPERATING COSTS AND EXPENSES 25,969 36,210 10,241
----------- ----------- --------
OPERATING INCOME (LOSS) $ (7,790) $ (14,774) $ 6,984
----------- ----------- --------
Internet/Direct Commerce revenues decreased $3.3 million, or 15.2%, to $18.2
million for the nine months ended September 30, 2004, from $21.4 million for the
nine months ended September 30, 2003. The decrease was primarily due to lower
commerce sales related to our catalog offerings, partially offset by increased
revenue from our direct-to-consumer floral business. The decline in commerce
sale was largely attributable to our planned lower catalog circulation. The
decline in other revenue was principally due to lower advertising revenue.
Production, distribution and editorial costs decreased $8.3 million, due to
lower catalog production and distribution costs of $3.8 million due to reduced
catalog circulation. Lower costs were also due in part to lower product sales,
an improved product gross margin and improved fulfillment efficiencies, which
collectively contributed to $2.6 million of lower costs in the period. The prior
year period benefited from the successful disposition of previously written down
obsolete and slow moving inventory which increased gross margins in that period
The segment continued to benefit from the restructuring initiated in the first
half of 2003, which reduced headcount and lowered technology costs. General and
administrative expenses decreased $1.8 million due primarily to lower employee
related expenses and lower professional fees.
CORPORATE
2004 2003
(unaudited) (unaudited) Variance
----------- ----------- --------
CORPORATE OPERATING COSTS AND EXPENSES
Production, distribution and editorial $ 277 $ 298 $ 21
Selling and promotion 77 708 631
General and administrative 31,767 27,783 (3,984)
Amortization of non-cash compensation expense 3,414 241 (3,173)
Depreciation and amortization 3,224 3,713 489
----------- ----------- --------
TOTAL CORPORATE OPERATING COSTS AND EXPENSES 38,759 32,743 (6,016)
----------- ----------- --------
OPERATING LOSS $ (38,759) $ (32,743) $ (6,016)
----------- ----------- --------
24
Corporate overhead, including depreciation and amortization and the amortization
of non-cash stock compensation increased $6.0 million, or 18.4%, to $38.8
million for the nine months ended September 30, 2004, from $32.7 million for the
nine months ended September 30, 2003. Selling and promotion expenses decreased
$0.6 million, as the prior year quarter included media spending associated with
a corporate advertising program. General and administrative expenses increased
$4.0 million principally resulting from higher employee-related costs, including
retention programs of $3.4 million as well as higher corporate communications
and consulting fees, partially offset by lower insurance and location fees. The
increase in the amortization of non-cash compensation expense principally
relates to the amortization of the value of restricted stock units granted in
connection with a November 2003 stock option exchange program.
OTHER ITEMS
Income tax benefit (expense). Income tax expense for the nine months ended
September 30, 2004 was $2.5 million, compared to an income tax benefit of $3.1
million for the nine months ended September 30, 2003. The current period
provision includes a valuation allowance of $21.9 million taken against certain
deferred tax assets since the amounts and extent of the Company's future
earnings are not determinable with a sufficient degree of probability.
Loss from discontinued operations. Loss from discontinued operations was $0.4
million for the nine months ended September 30, 2004 compared to $0.6 million
for the nine months ended September 30, 2003. Discontinued operations represent
the operations of the Wedding List, which the Company decided to discontinue in
2002. The current year expenses are primarily facility related.
Net Loss. Net loss was $52.3 million for the nine months ended September 30,
2004, compared to a net loss $5.1 million for the nine months ended September
30, 2003, as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $112.3 million and $165.6 million and short-term
investments were $38.9 million and $3.1 million at September 30, 2004 and
December 31, 2003, respectively.
Cash flows used in operating activities were $10.9 million and $2.7 million
during the nine months ended September 30, 2004 and 2003, respectively. Cash
flows used in operating activities during the nine months ended September 30,
2004 were primarily due to a net loss for the period of $52.3 million, partially
offset by changes in operating assets and liabilities of $29.2 million,
depreciation and amortization of $5.0 million, an increase in the deferred
income tax expense of $3.8 million, as well as the amortization of equity based
compensation expense of $3.5 million. The changes in operating assets and
liabilities include a decrease in accounts receivable due to the collection of a
royalty receivable due from Kmart related to our minimum royalty payment, as
well as the receipt of our federal income tax refund for calendar 2003. Cash
used in operating activities during the nine months ended September 30, 2003
were primarily due to a net loss for the period of $5.1 million and decreases in
operating assets and liabilities of $4.1 million, partially offset by
depreciation and amortization of $6.1 million. The changes in operating assets
and liabilities include a decrease in accounts receivable due principally to
lower advertising revenue, offset by a decrease in accounts payable and lower
deferred subscription income.
Cash flows used in investing activities were $43.0 million during the nine
months ended September 30, 2004, compared to cash provided by investing
activities of $12.5 million during the nine months ended September 30, 2003.
Cash flows used in investing activities in 2004 resulted from the net purchase
of short-term investments of $35.8 million, the acquisition of certain assets of
Body & Soul magazine and the Dr. Weil Self Healing newsletter of $6.4 million
and as well as capital expenditures $0.8 million. Cash flows provided by
investing activities in 2003 resulted from the sale of short-term investments of
$13.6 million, partially offset by capital expenditures of $1.0 million. We
expect capital expenditures in 2004 to approximate $1.0 million.
Cash flows provided by financing activities for the nine month periods ended
September 30, 2004 and 2003 were $0.6 and $0.2 million, respectively,
representing proceeds received from the exercise of employee stock options.
We have a line of credit with Bank of America in the amount of $5.0 million,
which is generally used to secure outstanding letters of credit. As of September
30, 2004, we had no outstanding borrowings under this facility.
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We believe that our available cash balances and short-term investments together
with any funds available under existing credit facilities will be sufficient to
meet our operating and recurring cash needs for foreseeable periods. We have not
paid dividends on our common stock and have no intention to pay any dividends in
the foreseeable future.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, in our Publishing segment, the publication schedule of Special
Interest Publications can vary from quarter to quarter. Internet/Direct Commerce
revenues have tended to be higher in the fourth quarter due to increased catalog
circulation and consumer spending during that period. Revenues from the
Merchandising segment can vary significantly from quarter to quarter due to new
product launches and the seasonality of certain product lines. In addition, we
expect to recognize the pro-rata portion of the difference between the minimum
royalty amount under the Kmart contract and royalties paid on actual sales in
the fourth quarter of 2004 and first quarter of 2005, net of amounts required to
be deferred, when the amount can be determined.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, inventories, long-lived assets and accrued losses. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies, the following may
involve the highest degree of judgment and complexity.
Revenue Recognition
Revenues are recognized when realized or realizable and earned. Revenues and
associated accounts receivable are recorded net of provisions for estimated
future returns, doubtful accounts and other allowances. Newsstand revenues in
our Publishing segment and product sales in our Internet/Direct Commerce segment
are recognized based upon assumptions with respect to future returns. The
Company bases its estimates on historical experience and current market
conditions. Reserves are adjusted regularly based upon actual results. We
maintain allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Revenues for
royalties in our merchandising business are accrued on a monthly basis based on
sales volume data provided to us by our strategic partners and payment is
generally made by our partners on a quarterly basis. For the nine month period
ended September 30, 2004, the Company has recognized royalty revenues earned
under our agreement with Kmart based upon actual royalties earned for sales in
2004 and the pro-rata portion of the 2003 minimum guarantee that related to
January 2004. Contractual minimum amounts under the agreement with Kmart are
computed on January 31st annually and are payable shortly thereafter. We expect
to recognize the difference between the minimum royalty amount and royalties
paid on actual sales in the fourth quarter of 2004 and first quarter of 2005,
net of amounts required to be deferred, when the amount can be determined.
Certain of our other merchandising agreements contain minimum guarantee
provisions. These minimum guarantees will be recorded when such amounts are both
determinable and deemed collectible.
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Inventory
Inventory, consisting of paper and product merchandise, is stated at the lower
of cost or market. The Company has recorded a reserve for excess and obsolete
product inventory, reducing inventory from cost to estimated market value, based
upon historical experience and current market conditions. The reserve is
evaluated regularly based upon actual results and adjusted accordingly.
Television Production Costs
Television production costs are capitalized and amortized based upon estimates
of future revenues to be received for the applicable television product. The
Company bases its estimates on existing contracts for programs, historical
advertising rates and ratings as well as market conditions. Estimated future
revenues are adjusted regularly based upon actual results and changes in market
and other conditions.
Long-Lived Assets
We review the carrying values of our long-lived assets whenever events or
changes in circumstances indicate that such carrying values may not be
recoverable. Unforeseen events and changes in circumstances and market
conditions and material differences in the value of long-lived assets due to
changes in estimates of future cash flows could negatively affect the fair value
of our assets and result in an impairment charge.
Intangible assets
Commencing January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible
assets with indefinite lives no longer be amortized to earnings and be tested
for impairment at least annually. The impairment tests are based upon a
fair-value approach as described in SFAS No. 142. Tests for impairment or
recoverability require significant management judgment, and future events
affecting cash flows and market conditions could result in impairment losses.
The Company has elected to annually test for goodwill impairment in the fourth
quarter of its fiscal year.
Advertising Cost
Advertising costs, consisting primarily of direct-response advertising, are
expensed in the period in which the advertising effort takes place.
Forward-looking Statements
We have included in this Quarterly Report certain "forward-looking statements,"
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but instead represent
only our current beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside of our control. These statements
can be identified by terminology such as "may," "will," "should," "could",
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. The Company's actual results may differ materially from those
projected in these statements, and factors that could cause such differences
include further adverse reaction to the prolonged and continued negative
publicity relating to Martha Stewart by consumers, advertisers and business
partners; further adverse reaction by the Company's consumers, advertisers and
business partners to the outcome of Ms. Stewart's legal proceeding arising from
a sale of non-Company stock by Ms. Stewart; a loss of the services of Ms.
Stewart; a loss of the services of other key personnel; an adverse resolution to
the SEC enforcement proceeding currently underway against Ms. Stewart arising
from her personal sale of non-Company stock; adverse resolution of some or all
of the Company's ongoing litigation; downturns in national and/or local
economies; shifts in our business strategies; a softening of the domestic
advertising market; changes in consumer reading, purchasing and/or television
viewing patterns; unanticipated increases in paper, postage or printing costs;
operational or financial problems any of our contractual business partners; the
receptivity of consumers to our new product introductions; and changes in
government regulations affecting the Company's industries. Certain of these and
other factors are discussed in more detail in other parts of this report,
especially in this section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14 (c) under the Securities
Exchange Act of 1934) as of September 30, 2004. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation. In addition, no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 3, 2003, the Company was named as a defendant in a Consolidated and
Amended Class Action Complaint (the "Consolidated Class Action Complaint"),
filed in the United States District Court for the Southern District of New York,
by plaintiffs purporting to represent a class of persons who purchased common
stock in the Company between January 8, 2002 and October 2, 2002. In re Martha
Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The
Consolidated Class Action Complaint also names Martha Stewart and seven of the
Company's other present or former officers (Gregory R. Blatt, Sharon L. Patrick,
and five other Company officers (collectively, the "Individual Defendants")) as
defendants. The action consolidates seven class actions previously filed in the
Southern District of New York: Semon v. Martha Stewart Living Omnimedia, Inc.
(filed August 6, 2002), Rosen v. Martha Stewart Living Omnimedia, Inc. (filed
August 21, 2002), MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed
August 30, 2002), Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed
September 4, 2002), Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed
September 6, 2002), Steele v. Martha Stewart Living Omnimedia, Inc. (filed
September 13, 2002), and Hackbarth v Martha Stewart Living Omnimedia, Inc.
(filed September 18, 2002). The claims in the Consolidated Class Action
Complaint arise out of Ms. Stewart's sale of 3,928 shares of ImClone Systems
stock on December 27, 2001. The plaintiffs assert violations of Sections 10(b)
(and rules promulgated thereunder), 20(a) and 20A of the Securities Exchange Act
of 1934. The plaintiffs allege that MSO, Ms. Stewart and the Individual
Defendants made statements about Ms. Stewart's sale that were materially false
and misleading. The plaintiffs allege that, as a result of these false and
misleading statements, the market price of the Company's stock was inflated
during the putative class periods and dropped after the alleged falsity of the
statements became public. The plaintiffs further allege that the Individual
Defendants traded MSO stock while in possession of material non-public
information. The Consolidated Class Action Complaint seeks certification as a
class action, damages, attorneys' fees and costs, and further relief as
determined by the court.
On May 19, 2003, the Company's motion to dismiss the Consolidated Class Action
Complaint was denied, and discovery in that action is ongoing. By stipulation of
the parties, and an order of the court entered November 10, 2003, all claims
asserted in the Consolidated Class Action Complaint pursuant to Section 20A
(Insider Trading) of the Securities Exchange Act against the Individual
Defendants, and all remaining claims against the Individual Defendants, other
than Mr. Blatt and Ms. Patrick, have been dismissed without prejudice.
The Company has also been named as a nominal defendant in four derivative
actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart
Living Omnimedia, Inc. Shareholder Derivative Litigation (the "Shareholder
Derivative Litigation"), filed on December 19, 2002 in New York State Supreme
Court; Beam v. Stewart, initially filed on August 15, 2002 and amended on
September 6, 2002, in Delaware Chancery Court; Richards v. Stewart, filed on
November 1, 2002 in Connecticut Superior Court; and Sargent v. Martinez, filed
on September 29, 2003 in the U.S. District Court for the Southern District of
New York. Company directors Arthur Martinez, Sharon Patrick, Jeffrey Ubben and
former directors John Doerr, Darla Moore and Naomi Seligman, are also named as
defendants in Beam. Mr. Martinez, Ms. Patrick, Mr. Ubben, Mr. Doerr, Ms. Moore,
Ms. Seligman, five of the Company's present or former officers (Mr. Blatt, Ms.
Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins Caufield &
Byers are also named as defendants in Richards. Mr. Martinez, Ms. Patrick, Mr.
Ubben, Ms. Moore and Ms. Seligman are also named as defendants in Sargent. In re
Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation
consolidates three previous derivative complaints filed in New York State
Supreme Court and
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Delaware Chancery Court: Beck v. Stewart, filed on August 13,
2002 in New York State Supreme Court, Kramer v. Stewart, filed on August 20,
2002 in New York State Supreme Court, and Alexis v. Stewart, filed on October 3,
2002 in Delaware Chancery Court. Sargent consolidates two derivative complaints
previously filed in the U.S. District Court for the Southern District Court of
New York: Acosta v. Stewart, filed on October 10, 2002, and Sargent v. Martinez,
filed on May 30, 2003.
All four derivative actions allege that Ms. Stewart breached her fiduciary
duties to the Company by engaging in insider trading in ImClone stock and making
false and misleading statements about such trading. The plaintiffs allege that
these actions have diminished Ms. Stewart's reputation and injured the Company
through lost revenues, loss of reputation and good will, decreased stock price,
and increased costs. The plaintiff in Beam further alleges that (i) Ms.
Stewart's actions have jeopardized the Company's intellectual property; (ii) the
directors breached their fiduciary duties by failing to monitor Ms. Stewart's
affairs to ensure she did not harm the Company; (iii) Ms. Stewart and the other
directors breached their fiduciary duties by failing to address the impropriety
of the Company's payment of split-dollar insurance premiums; and (iv) Ms.
Stewart and Mr. Doerr usurped corporate opportunities by selling personally
owned Company stock to an investment firm without first presenting the Company
with the opportunity to sell its stock to the firm. The plaintiffs in the
Shareholder Derivative Litigation also allege that Ms. Stewart breached the
terms of her employment agreement with the Company. The plaintiff in Richards
further alleges (i) intentional breach of fiduciary duty by, among other things,
acting in reckless disregard of, and failing to prevent, Ms. Stewart's insider
trading in ImClone stock, violating federal securities laws by selling Company
stock while in possession of material, non-public information, misuse of
corporate information, and gross mismanagement of the Company; (ii) negligent
breach of fiduciary duty; (iii) abuse of control; (iv) constructive fraud; (v)
gross mismanagement; and (vi) waste. The plaintiffs in Sargent further allege
that the directors breached their fiduciary duties by (i) failing to take
appropriate action to address Ms. Stewart's wrongdoing; (ii) granting Ms.
Stewart a bonus for 2002; and (iii) endorsing an amendment to the Company's
agreement with Ms. Stewart for the rental of certain properties.
The derivative actions seek damages in favor of the Company, attorneys' fees and
costs, and further relief as determined by the court. Certain of the complaints
also seek declaratory relief. The plaintiffs in the Shareholder Derivative
Litigation and Sargent further seek the creation of a committee or other
administrative mechanism to address the alleged "corporate governance" issues
raised in the complaints and to protect the Company's "cornerstone assets." The
plaintiff in Richards further seeks injunctive relief in the form of attachment
or other restriction of the proceeds of defendants' trading activities or other
assets.
On April 17, 2003, the Company's motion to dismiss the Shareholder Derivative
Litigation was granted to the extent that the action has been stayed pending
plaintiffs' submission of a demand to initiate litigation on the Company's Board
or a determination by the Federal District Court in the Acosta action (now the
consolidated Sargent action) that such a demand is excused. On September 30,
2003, the Company's motion to dismiss the Beam complaint was granted in its
entirety. The plaintiffs in Beam appealed the dismissal of the complaint to the
Delaware Supreme Court. On March 31, 2004, the Delaware Supreme Court, sitting
en banc, unanimously affirmed the dismissal of the Beam complaint. The Sargent
action had previously been stayed by order of the court pending resolution of
the Beam appeal by the Delaware Supreme Court. On April 22, 2004, the court
lifted that stay and ordered the plaintiffs to respond to MSO's and the MSO
directors' previously filed motions to dismiss. By order dated August 4, 2004,
the Company's motion to dismiss the Sargent complaint was granted in its
entirety, and as to the issue of plaintiffs' failure to make pre-suit demand,
with prejudice. The Sargent plaintiffs' time to appeal that dismissal has
expired. The Richards action had been stayed by agreement of the parties pending
resolution of the Beam appeal by the Delaware Supreme Court. By motion filed
June 4, 2004, the plaintiff in the Richards action voluntarily sought an order
dismissing the Richards action with prejudice, and that dismissal with prejudice
was ordered by the court on June 9, 2004. By stipulation and order entered
September 24, 2004, the parties to the Shareholder Derivative Litigation agreed
to the dismissal of that action on the same terms as ordered by the Sargent
Court in dismissing the Sargent Action.
While still in its early stages, we believe the Company has substantial defenses
to the remaining Consolidated Class Action Complaint. The Company is unable to
predict the outcome of that action or reasonably estimate a range of possible
loss at this time.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Title
- ------ -------------
10.1 Employment Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart
(incorporated by reference to the 8-K filed on September 23, 2004).
10.2 Location Rental Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha
Stewart (incorporated by reference to the 8-K filed on September 23, 2004).
10.3 Letter Agreement dated September 17, 2004 between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated
by reference to the 8-K filed on September 23, 2004).
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(b) Reports on Form 8-K
On August 3, 2004, the Company filed a Current Report on Form 8-K
reporting its earnings for its fiscal second quarter ended June 30, 2004.
On August 5, 2004, the Company filed a Current Report on Form 8-K
providing a transcript of its fiscal second quarter earnings conference
call held on August 3, 2004.
On September 23, 2004, the Company filed a Current Report on Form 8-K
disclosing the execution of a new employment agreement and other
agreements with Martha Stewart and the issuance of a warrant to Mark
Burnett with respect the issuance of up to 2.5 million shares of our Class
A common stock.
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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: November 9, 2004
/s/ James Follo
-----------------------
Name: James Follo
Title: Executive Vice President, Chief
Financial and Administrative Officer
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