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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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,
New York 10036
- --------------------------------- -------------------------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (212) 827-8000
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on
Which Registered
--------------------------- -----------------------------
Class A Common Stock, Par New York Stock Exchange
Value $0.01 Per Share
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the number of shares outstanding on
April 26, 2004, but using the price at which the stock was last sold on June
30, 2003, was $109,586,774.*
* Excludes 8,134,196 shares of our Class A Common Stock, and 29,758,745
shares of our Class B Common Stock, held by directors, officers and holders
of more than 5% of either class of the Company's stock, as of April 26, 2004.
Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the Company, or that such
person is controlled by or under common control with the Company.
NUMBER OF SHARES OUTSTANDING AS OF APRIL 26, 2004:
19,804,779 SHARES OF CLASS A COMMON STOCK
29,758,745 SHARES OF CLASS B COMMON STOCK
TABLE OF CONTENTS
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
Item 14. Principal Accountant Fees and Services.
Signatures
Exhibit Index
EXPLANATORY NOTE
Except for the inclusion of the information required by Part III of Form
10-K, no changes have been made to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003 filed with the SEC on March 15, 2004.
This Form 10-K/A does not update any disclosures to reflect developments
since the original filing date. Except for the inclusion of the information
required by Part III of Form 10-K, no changes have been made to the
Company's Annual Report on Form 10-K for the year ended December 31, 2003
filed with the SEC on March 15, 2004. This Form 10-K/A does not update any
disclosures to reflect developments since the original filing date.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION CONCERNING DIRECTORS
The names and certain background information about our Board members
are set forth below.
Arthur C. Martinez, age 64, has served as one of our directors since
January 2001. Until December 2000, Mr. Martinez served as Chairman of the
board of directors of Sears Roebuck and Co. and was its Chief Executive
Officer from August 1995 until October 2000. Mr. Martinez joined Sears,
Roebuck and Co. in September 1992 as the Chairman and Chief Executive
Officer of Sears Merchandise Group, Sears's former retail arm. From 1990 to
1992, he was Vice Chairman of Saks Fifth Avenue and was a member of Saks
Fifth Avenue's board of directors. Mr. Martinez is currently a member of
the boards of directors of PepsiCo, Inc., Liz Claiborne, Inc.,
International Flavors & Fragrances, Inc. and ABN AMRO Bank.
Sharon L. Patrick, age 61, has served as our President and Chief
Executive Officer since June 2003 and as one of our Directors since 1997.
From 1997 until 2003 she was our President and Chief Operating Officer.
From 1993 until 1997, Ms. Patrick served as President of The Sharon Patrick
Company, a strategic consulting company, and Sharon Patrick and Associates,
a new media venture firm. From l990 until 1993, Ms. Patrick was President
and Chief Operating Officer of Rainbow Programming Holdings, the
programming company of Cablevision Systems Development. Prior to that, she
was a Principal at McKinsey and Company and the Partner-in-charge of
McKinsey and Company's Media and Entertainment Practice, which she
co-founded.
Thomas C. Siekman, age 62, has served as one of our directors since
August 2003. Mr. Siekman most recently served as "Of Counsel" to Skadden,
Arps, Slate, Meagher & Flom LLP during 2003. Prior to joining Skadden,
Arps, Slate, Meagher & Flom LLP, Mr. Siekman was Senior Vice President and
General Counsel of Compaq Computer Corporation. From 1973 to 1998, he
served in various capacities with Digital Equipment Corporation, most
recently as Senior Vice President and General Counsel, until Digital was
acquired by Compaq in 1998.
Bradley E. Singer, age 37, has served as one of our directors since
December 2003. Mr. Singer has been the Chief Financial Officer and
Treasurer of American Tower Corporation since 2001 and has held various
executive positions since 2000. Prior to this, he was an investment banker
in the Communications, Media and Entertainment group at Goldman, Sachs &
Co. from 1997 to 2000. From 1991 through 1995 Mr. Singer was Chief
Financial Officer of Clyde's Restaurant Group. Mr. Singer is also a
director of FiberTower Corporation.
Jeffrey W. Ubben, age 42, has served as Chairman of the Board since June
2003 and has served as one of our directors since January 2002. Mr. Ubben
is a founder and Managing Partner of VA Partners, L.L.C., an investment
partnership. From 1995 to 2000, Mr. Ubben was a Managing Partner of Blum
Capital. Prior to that, he was a portfolio manager for Fidelity Investments
from 1987 to 1995. Mr. Ubben is also a director of Insurance Auto Auctions,
Inc.
INFORMATION CONCERNING EXECUTIVE OFFICERS
The names, ages and certain background information about our executive
officers and certain significant employees are set forth below.
Gael Towey, age 52, has served as our Senior Executive Vice President and
Creative Director since January 2001 and, prior to that time, as our
Executive Vice President, Art and Style and Creative Director since
February 1997. Prior to that, Ms. Towey worked for Martha Stewart Living as
the Design Director from 1996 to 1997 and as Art Director from 1990 to
1996. Ms. Towey also has an additional 15 years of experience in the
publishing industry, including with House & Garden magazine, Clarkson N.
Potter and Viking Press, Inc.
Dora Braschi Cardinale, age 47, has served as our Executive Vice
President, Print Production since May 1999 and prior to that as our Senior
Vice President, Print Production from 1997 until 1999. Previously, Ms.
Cardinale served as Production Director of Martha Stewart Living from 1992
until 1997. Ms. Cardinale has an additional 15 years of experience in the
publishing industry, including positions with Art & Antiques, Geo, Viva and
Omni magazines.
Heidi Diamond, age 45, has served as our Executive Vice President,
President, Television since August 2002. Previously, she served as
Executive Vice President of AMC Networks and Rainbow Media since September
2001. Prior to that, she served as The Food Network's Senior Vice
President, Strategic Network Planning/Development from January 2001 until
June 2001 and as its Senior Vice President Marketing, Creative and Business
Development from May 1998 until December 2000. Before joining The Food
Network, Ms. Diamond held executive positions in marketing at several other
leading cable companies, including Primedia/Channel One and Nickelodeon.
Jay L. Dubiner, age 40, has served as our Executive Vice President,
Corporate Development & General Counsel since February 2004. Prior to this,
he provided legal and corporate development consulting services to clients
primarily in the media industry. From February 2000 to March 2002 Mr.
Dubiner served as Senior Vice President, Business Development & Strategic
Planning for a division of The Universal Music Group. Mr. Dubiner was an
associate in the corporate department of the New York law firm of Paul
Weiss Rifkind Wharton & Garrison from September 1993 to February 2000
specializing in mergers and acquisitions. He has an additional 2 years
experience practicing law at Olser Hoskin & Harcourt in Toronto, Canada. In
1984 Mr. Dubiner served as a Special Assistant to the Prime Minister of
Canada.
James Follo, age 44, has served as our Executive Vice President, Chief
Financial and Administrative Officer since October 2003. From March 2001 to
October 2003, Mr. Follo served as our Executive Vice President and Chief
financial Officer. Prior to that, he served as our Senior Vice President,
Finance and Controller from March 1999 to March 2001 and, previously, as
our Vice President, Finance and Controller from July 1998. Prior to that,
Mr. Follo held various financial positions at General Media International,
Inc., a magazine publisher, from 1994 to July 1998, most recently as Vice
President, Chief Financial Officer and Treasurer.
Margaret Roach, age 49, has served as our Executive Vice President,
Editor-in-Chief since February 2002. From March 2001 until February 2002,
Ms. Roach was Executive Vice President, Internet/Direct Commerce. Prior to
that, she was Senior Vice President, Internet Production and Operations
from October 2000 to March 2001. From January 1, 2000 to October 2000, she
was our Senior Vice President, Garden Editor. From 1998 until 1999, she
served as our Vice President, Gardening. From 1995 to 1998, Ms. Roach was
Garden Editor of Martha Stewart Living, and a contributing editor for
Martha Stewart Living from 1993 to 1994. Ms. Roach was Fashion and Garden
Editor of New York Newsday from 1985 to 1995 and also has an additional 10
years of experience in the publishing business, including with The New York
Times. Ms. Roach won the 1998 Best Written Book Of The Year award from the
Garden Writers of America for A Way to Garden.
Suzanne Sobel, age 47, has served as our Executive Vice President,
Advertising Sales/Marketing, Publisher since January 1999 and as our Senior
Vice President, Advertising Sales & Marketing during 1998. Additionally,
Ms. Sobel has served as Publisher of Martha Stewart Living since 1997 and
as its Associate Publisher from 1996 to 1997. Prior to that, Ms. Sobel
served as our Advertising Director from 1995 to 1996, as New York
Advertising Sales Manager from 1993 to 1995 and as Advertising Sales
Manager from 1991 to 1993. Ms. Sobel has an additional 14 years of industry
experience with Town & Country magazine, Bob Bernbach & Associates and
Ogilvy & Mather.
Lauren Stanich, age 42, has served as our Executive Vice President,
President, Publishing and Internet/Direct Commerce since March 2003 and,
prior to that, as our Executive Vice President, President, Publishing from
January 1999 to March 2003 and as our Senior Vice President, Consumer
Marketing from 1997 until 1999. Ms. Stanich worked as our Consumer
Marketing Director and Book Publisher from 1995 to 1997 and as Consumer
Marketing Director for Martha Stewart Living from 1991 to 1995. Ms. Stanich
has an additional seven years of experience in marketing and publishing
with Time, Inc.
Martha Stewart, age 62, has served as our Founding Editorial Director, a
non-officer position, since March 2004. Ms. Stewart is the founder of the
Company and the author of numerous books on the domestic arts, including
Entertaining and Martha Stewart's Gardening. Ms. Stewart served as our
Chairman of the Board and Chief Executive Officer from our creation in 1996
until June 2003, when she resigned as our Chief Executive Officer. Ms.
Stewart continued to serve as our Chief Creative Officer until March 2004
when she resigned as Chief Creative Officer and assumed the position of
Founding Editorial Director.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors, and persons who own more
than 10% of a registered class of our equity securities, to file initial
statements of beneficial ownership (Form 3) and statements of changes in
beneficial ownership (Forms 4 and 5) of our common stock with the
Securities and Exchange Commission. Such persons are required by the
Securities and Exchange Commission rules to furnish us with copies of all
such forms they file. Based solely on a review of the copies of such forms
furnished to us and/or written representations that no additional forms
were required, we believe that all our officers, directors and greater than
10% beneficial owners filed all such required forms with respect to 2003
transactions, except for stock option grants in June 2003 to Mr. Martinez,
Mr. Ubben, and former directors Ms. Darla D. Moore and Ms. Naomi O.
Seligman, which were reported in July 2003, and certain exempt bona fide
gift dispositions by Ms. Sharon Patrick in August and December 2002, which
were reported in February 2004.
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to
all of our directors, officers and employees, including our chief executive
officer and senior financial and accounting officers. Our Code of Business
Conduct and Ethics requires, among other things, that all of our directors,
officers and employees comply with all laws, avoid conflicts of interest,
conduct business in an honest and ethical manner and otherwise act with
integrity and in the Company's best interest. In addition, our Code of
Business Conduct and Ethics imposes obligations on all of our directors,
officers and employees to maintain books, records, accounts and financial
statements that are accurate and comply with applicable laws and with our
internal controls. We will post a copy of our Code of Business Conduct and
Ethics, and will promptly post any amendments to or waivers of our Code of
Business Conduct and Ethics, on our website (www.marthastewart.com) under
the link for "Investor Relations." Stockholders may request a written copy
of the Code of Business Conduct and Ethics by writing to our Corporate
Secretary, Martha Stewart Living Omnimedia, Inc., 11 West 42nd Street, New
York, New York 10036.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OUTSIDE DIRECTORS
We pay our Chairman of the Board and the Lead Director each an annual
retainer of $70,000, payable quarterly in equal installments. We pay our
non-employee directors an annual retainer of $40,000 for serving on our
Board, payable quarterly in equal installments. These directors each also
receive a meeting fee of $1,000 for each in-person meeting of our Board that
they attend and a fee of $500 for each committee or telephonic Board meeting
in which they participate. The chairman of a Board committee receives an
additional annual retainer of $7,000. Twenty-five percent of a director's
fees are paid in shares of our Class A Common Stock, and the remaining 75% of
such fees may be paid either in such shares or in cash, at the election of
the director, under our Non-Employee Director Stock and Option Compensation
Plan described below. All directors receive reimbursement of expenses
incurred in connection with participation in our Board and Board committee
meetings. Directors who also are our employees do not receive additional
compensation for their services as a director. In June 2003, Mr. Ubben
assumed the position of Chairman of the Board and Mr. Martinez assumed the
position of Lead Director. For 2003, Mr. Ubben received $35,000 for his
duties as Chairman of the Board and Mr. Martinez received $35,000 for his
duties as Lead Director of the Board.
EXECUTIVE COMPENSATION
General
The following table sets forth certain information pertaining to
compensation of our Chief Executive Officer, our former Chief Executive
Officer and our four other most highly compensated executive officers for 2003
(the "Named Executives"). The following table presents information
concerning total compensation earned by the Named Executives for services
rendered to us during 2001, 2002 and 2003.
Annual Compensation Long Term Compensation
----------------------------------------------------- -------------------------
Securities
Restricted Underlying All Other
Salary Bonus Other Annual Stock Option Compensation
Fiscal Year ($) ($) Compensation Awards($) Awards(#)(1) ($)
----------- -------- -------- ------------- ----------- ------------ ------------
Sharon Patrick 2003 $850,746 $800,000 -- -- -- $3,564(2)
President and Chief 2002 844,369 680,600 -- $334,500(3) 100,000 3,516(2)
Executive Officer(4) 2001 700,000 280,000 -- -- 130,000 2,322(2)
Martha Stewart 2003 $ 900,000 $ 500,000 $ 128,131(5) -- -- 3,564(6)
Chief Creative 2002 900,000 680,600 163,781(5) -- 150,000 616,707(6)
Officer, 2001 900,000 1,156,666 52,915(5) -- -- 647,737(6)
Former Chief
Executive Officer
and Chairman of the
Board(7)
James Follo 2003 $ 410,000 $ 335,790 -- $702,477(8) -- $ 6,540(9)
Executive Vice 2002 406,402 369,000 -- 100,350 25,000 6,040(9)
President, 2001 301,731 97,500 -- -- 118,000 5,618(9)
Chief Financial and
Administrative
Officer
Suzanne Sobel 2003 $ 404,875 $ 340,095 -- $638,461(8) -- $6,810(10)
Executive Vice 2002 400,910 425,119 -- 100,350 25,000 6,310(10)
President, 2001 310,411 108,850 -- -- 38,000 5,910(10)
Advertising Sales/
Marketing,
Publisher
Lauren Stanich 2003 $ 389,112 $ 350,000 -- $687,737(8) -- $6,540(11)
Executive Vice 2002 351,534 226,628 -- 100,350 25,000 6,040(11)
President, 2001 310,384 90,000 -- -- 38,000 5,618(11)
President,
Publishing and
Internet/Direct
Commerce
Gael Towey 2003 $410,000 $287,000 -- $1,009,194(8) -- $7,242(12)
Senior Executive 2002 409,066 315,700 -- 100,350 25,000 6,725(12)
Vice President, 2001 387,498 135,800 38,000 5,946(12)
Creative Director
- ------------------------
<FN>
(1) All options reflected in this table were granted pursuant to the
Martha Stewart Living Omnimedia, Inc. 1999 Stock Incentive Plan (the
"1999 Stock Incentive Plan").
(2) Represents the value of group life insurance premiums paid by us on
behalf of the Named Executive.
(3) As of December 31, 2003, Ms. Patrick held 50,000 shares of restricted
stock with a value of $492,500; the restrictions on these shares of
restricted stock will lapse on August 9, 2004.
(4) Ms. Patrick has been the Company's Chief Executive Officer since June
4, 2003. Prior to assuming the position of Chief Executive Officer,
Ms. Patrick was the Company's President and Chief Operating Officer.
(5) Other Annual Compensation reported for Ms. Stewart includes $100,000
each in 2003 and 2002, representing the portion of the cost of tax
preparation services provided by the Company to senior executive
officers which was allocated by the preparer to Ms. Stewart, and
$63,781 and 52,915, in 2002 and 2001, respectively, representing the
unreimbursed portion of the cost to the Company of Ms. Stewart's
personal use of the Company's right to use an aircraft. In 2001, the
aggregate cost to the Company of tax preparation services provided to
certain senior executive officers, including Ms. Stewart, was
$126,000, substantially comparable to 2002 and 2003, but the preparer
did not allocate this cost among the senior executive officers. The
value of any other single perquisite or personal benefit the Company
provided to Ms. Stewart in 2003, 2002 or 2001, did not exceed 25% of
the aggregate value of all such perquisites or personal benefits.
(6) Represents an amount paid by us on Ms. Stewart's behalf pursuant to a
group term life policy as well as a reportable benefit to Ms. Stewart
relating to premiums paid by us pursuant to a split-dollar life
insurance arrangement between Ms. Stewart, a partnership controlled by
her, and MSO. As required by the Securities and Exchange Commission,
the reported split-dollar benefit reflects the economic benefit Ms.
Stewart would have received if we had loaned her the amount of the
insurance premium paid by us on an interest-free basis through the
date we expect the premium to be repaid to us or, if earlier, the date
on which interest would begin to accrue for our benefit on such
amount. Due to an amendment in 2003 to the split-dollar arrangement,
no further premium payments have been made by us. See "Certain
Relationships and Related Party Transactions -- Transactions with
Martha Stewart - Split-Dollar Life Insurance." The group term life
payments were $3,564 in 2003, $3,516 in 2002 and $3,564 in 2001, while
the reportable split-dollar benefit was $613,191 in 2002 and $644,173
in 2001.
(7) Ms. Stewart served as the Company's Chief Executive Officer until June
4, 2003, when she resigned as Chief Executive Officer. Ms. Stewart
continued to serve as Chief Creative Officer of the Company until
March 2004, when she resigned as Chief Creative Officer and assumed
the position of Founding Editorial Director, a non-officer position.
(8) Represents the value of restricted stock units granted pursuant to an
offer to exchange stock options for restricted stock units. The value
set forth in the table is based on the closing price of our Class A
Common Stock on the date of grant of $10.83 per share. The restricted
stock units vest in two equal installments on November 7, 2004 and
November 7, 2005. Upon vesting, the holder receives, for each
restricted stock unit, an unrestricted share of our Class A Common
Stock (net of withholding taxes). If dividends are paid on shares of
our Class A Common Stock prior to the vesting date, the holders of
restricted stock units will be entitled upon vesting to receive
dividend equivalents in the form of additional restricted stock units.
As of December 31, 2003, Mr. Follo, Ms. Sobel, Ms. Stanich and Ms.
Towey held the following number of restricted stock units with the
following value: Mr. Follo, 64,864 and $638,910; Ms. Sobel, 58,953 and
$580,687; Ms. Stanich, 63,503 and $625,505; and Ms. Towey, 93,185 and
$917,872. In addition, as of December 31, 2003, each of these Named
Executives held 15,000 shares of restricted stock with a value of
$147,750; the restrictions on these shares of restricted stock will
lapse on August 9, 2004.
(9) Consists of matching contributions made by us to Mr. Follo's 401(k)
account of $6,000, $5,500 and $5,100 in 2003, 2002 and 2001,
respectively, and $540, $540 and $456 of the taxable value of group
life insurance premiums paid on behalf of Mr. Follo in 2003, 2002 and
2001, respectively.
(10) Consists of matching contributions made by us to Ms. Sobel's 401(k)
account of $6,000, $5,500 and $5,100 in 2003, 2002 and 2001,
respectively, and $810 of the taxable value of group life insurance
premiums paid on behalf of Ms. Sobel in each of 2003, 2002 and 2001.
(11) Consists of matching contributions made by us to Ms. Stanich's 401(k)
account of $6,000, $5,500 and $5,100 in 2003, 2002 and 2001,
respectively, and $540, $540 and $518 of the taxable value of group
life insurance premiums paid on behalf of Ms. Stanich in 2003, 2002
and 2001, respectively.
(12) Consists of matching contributions made by us to Ms. Towey's 401(k)
account of $6,000, $5,500 and $5,100 in 2003, 2002 and 2001,
respectively, and $1,242, $1,225 and $846 of the taxable value of
group life insurance premiums paid on behalf of Ms. Towey in 2003,
2002 and 2001, respectively.
</FN>
Option Grants
No option grants were made to the Named Executives in 2003.
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
The table below presents information concerning the exercise of stock
options by the Named Executives during the year ended December 31, 2003 and
the fiscal year-end value of all their unexercised options.
AGGREGATED OPTION EXERCISES IN 2003 AND OPTION VALUES AS OF DECEMBER 31, 2003
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at 12/31/03(#) at 12/31/03($)(1)
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- --------------- ------------ ----------- ----------- ------------- ----------- -------------
Sharon Patrick -- -- 674,346(2) 178,000(3) 1,078,747 230,250
Martha Stewart -- -- 150,000(3) 150,000(3) -- --
James Follo -- -- 6,250(3) 18,750(3) 19,188 57,563
Suzanne Sobel 10,844 90,141 33,083(4) 18,750(3) 267,393 57,563
Lauren Stanich 11,000 93,540 21,599(5) 18,750(3) 161,166 57,563
Gael Towey 22,100 189,142 191,332(6) 18,750(3) 1,712,009 57,563
- ----------
<FN>
(1) Calculated using the closing price of a share of our Class A Common
Stock on December 31, 2003, $9.85.
(2) Consists of options to acquire 108,324 shares of Class A Common Stock
granted under the Martha Stewart Living Omnimedia LLC Nonqualified
Class A LLC Unit / Stock Option Plan (the "1997 Plan") and options to
acquire 566,022 shares granted under the 1999 Stock Incentive Plan.
(3) Consists of options to acquire shares of Class A Common Stock granted
under the 1999 Stock Incentive Plan.
(4) Consists of options to acquire 26,833 shares of Class A Common Stock
granted under the 1997 Plan and options to acquire 6,250 shares
granted under the 1999 Stock Incentive Plan.
(5) Consists of options to acquire 15,349 shares of Class A Common Stock
granted under the 1997 Plan and options to acquire 6,250 shares
granted under the 1999 Stock Incentive Plan.
(6) Consists of options to acquire 212,682 shares of Class A Common Stock
granted under the 1997 Plan and options to acquire 6,250 shares
granted under the 1999 Stock Incentive Plan.
</FN>
Ten-Year Options/SAR Repricings
In 2003, the Compensation Committee authorized MSO to offer MSO's
officers with titles of Assistant Vice President and above (including the
Named Executives other than Ms. Stewart and Ms. Patrick) the right to
exchange options with exercise prices above $8 per share for restricted stock
units. The following table sets forth the number of options exchanged in the
exchange offer by each of the Named Executives.
Number of
Securities Length of Original
Underlying Market Price of Option Term
Options/SARs Stock at Time of Exercise Price at Remaining at
Repriced or Repricing or Time of Repricing New Exercise Price Date of Repricing
Name Date Amended (#) Amendment ($) or Amendment ($) ($) or Amendment
- ------------------- ----------- -------------- ------------------ ------------------ -------------------- ------------------
Sharon Patrick,
President and
Chief 11/7/2003 -- -- -- -- --
Executive
Officer(1)
Martha Stewart,
Chief Creative
Officer
Former Chief
Executive 11/7/2003 -- -- -- -- --
Officer and
Chairman of
the Board(2)
James Follo,
Executive Vice
President,
Chief
Financial and 11/7/2003 274,000 $10.83 $15-$18 -- (3) -- (3)
Administrative
Officer
Suzanne Sobel,
Executive Vice
President,
Advertising 11/7/2003 254,553 $10.83 $15-$18 -- (3) -- (3)
Sales/Marketing,
Publisher
Lauren Stanich,
Executive Vice
President,
President,
Publishing and 11/7/2003 275,123 $10.83 $15-$18 -- (3) -- (3)
Internet/
Direct Commerce
Gael Towey,
Senior
Executive Vice
President,
Creative 11/7/2003 704,666 $10.83 $15-$18 -- (3) -- (3)
Director
- ------------
<FN>
(1) Ms. Patrick has been the Company's Chief Executive Officer since June
4, 2003. Prior to assuming the position of Chief Executive Officer,
Ms. Patrick was the Company's President and Chief Operating Officer.
(2) Ms. Stewart served as the Company's Chief Executive Officer until June
4, 2003 when she resigned as Chief Executive Officer. Ms. Stewart
continued to serve as Chief Creative Officer of the Company until
March 2004, when she resigned as the Chief Creative Officer and
assumed the position of Founding Editorial Director, a non-officer
position.
(3) The options set forth in the table were exchanged for the following
number of restricted stock units: for Mr. Follo, 64,864; for Ms.
Sobel, 58,593; for Ms. Stanich, 63,503; and for Ms. Towey, 93,185.
Restricted stock units do not have an exercise price or term.
</FN>
Members of the Compensation and Corporate Governance Committee
Jeffrey W. Ubben
Arthur C. Martinez
Martha Stewart Living Omnimedia, Inc. 2003 Key Executive Bonus Plan
On September 22, 2003, MSO adopted the Martha Stewart Living
Omnimedia, Inc. 2003 Key Executive Bonus Plan with the twin goals of
rewarding and retaining key executives. The Compensation Committee selects
key executives to participate in the plan, provided that the Chief
Executive Officer and Ms. Stewart are not eligible to participate in the
plan. Subject to the terms and conditions of the plan, each participant
will be entitled to a bonus in an amount selected by the Compensation
Committee. One-half of the plan bonus payable to a participant will become
due and payable on each of June 30, 2004 and January 1, 2005, so long as
the participant remains employed as of each vesting date or, if earlier,
upon a termination of employment that entitles the participant to severance
under our 2002 executive severance pay plan. Mr. Follo, Ms. Sobel, Ms.
Stanich, and Ms. Towey participate in the 2003 key executive bonus plan,
and their plan bonuses are $615,000, $607,313, $600,000, and $615,000,
respectively. Under the plan, each participant is also guaranteed a regular
year-end bonus for each of 2003 and 2004 that is not less than 100% of the
participant's target bonus for the applicable year, so long as the
participant remains employed through the date generally established for
bonus eligibility.
The foregoing plan summary is subject in all respects to the plan
itself, a copy of which is on file with the SEC as an exhibit to our Annual
Report on Form 10-K.
COMPENSATION AND CORPORATE GOVERNANCE COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
The Compensation and Corporate Governance Committee of the Board,
currently consisting of Mr. Ubben and Mr. Martinez, neither of whom is
employed by MSO, furnished the following report on executive compensation for
the 2003 fiscal year.
Compensation Philosophy
MSO's executive compensation program is designed to encourage and reward
exceptional performance and to align the financial interests of its senior
executives and key employees with those of our stockholders. To achieve this
end, MSO has developed and implemented a compensation program designed to
attract and retain highly skilled executives and key employees with the
business experience and creative talent necessary for MSO to achieve its
long-term business objectives.
MSO's executive compensation generally consists of three components:
base salary, an annual performance-based bonus and equity-based
compensation. MSO's compensation goal is to target its executives to be paid
at competitive levels when performance expectations are met and above
competitive levels when expectations are exceeded. MSO periodically utilizes
outside consultants to perform competitive market-matching analyses on a
position-by-position basis against companies in businesses similar to those
of MSO and with comparable revenue levels. Once the market-matching analyses
have been completed, an executive's salary, bonus and/or equity-based
compensation may be adjusted upward or downward based on a number of
subjective factors, including past performance, prior experience, differences
in job responsibilities from the jobs against which the match was performed
and tenure. Additionally, although the market-matching study is periodically
updated, individual compensation levels may be adjusted from time to time
based upon, among other factors, past performance and increases in
responsibilities.
Base Salaries and Annual Bonuses
The Compensation Committee believes that compensation should be weighted
toward bonuses and equity-based compensation. Accordingly, base salaries
paid to MSO's executives tend to constitute a smaller percentage of total
compensation than they do for many comparable executives of MSO's
competitors. Each executive is assigned a bonus target, which is set as a
percentage of annual base salary. Each executive's actual bonus generally
ranges from 0% to 150% of the relevant bonus target, as set by the
Compensation Committee with input from senior management taking into account
MSO's performance against its objectives, the individual performance of a
particular executive, and other factors we deem relevant. This system
provides MSO the ability to use bonuses as an incentive to drive corporate
performance and to align the interests of executives with those of our
stockholders.
In 2003, we funded our executive bonus pool at 100% of target levels,
with individual awards varying from the mean based on individual performance
and contribution. Despite the fact that corporate performance did not meet
initial expectations in 2003, the Compensation Committee believes that the
commitment shown and contributions made by our executive team were
considerable during this difficult year and that it was in the best interests
of our stockholders to provide this level of compensation to reward and
facilitate retention of our key executives.
Under our 2003 key executive bonus plan, we have agreed to pay annual
bonuses to participants at not less than 100% of target levels in respect of
2003 and 2004.
Equity-Based Compensation
The Compensation Committee periodically makes equity grants under the
1999 Stock Incentive Plan to executives, taking into account market studies
prepared by independent consulting firms, the size of previous option grants,
tenure, past performance, responsibility levels, competitive practices and
other relevant factors. Traditionally, we have granted options to all new
executives upon commencement of employment with MSO and to all existing
executives annually. Additionally, option grants were made to all executives
upon becoming a public company in 1999 and a number of executives received
option grants previously under the 1997 Option Plan. All stock options
granted by MSO have been nonqualified stock options and have had exercise
prices equal to the fair market value of the underlying stock at the time of
grant.
In 2003, the Compensation Committee also authorized MSO to offer MSO's
officers with titles of Assistant Vice President and above (including the
Named Executives other than Ms. Stewart and Ms. Patrick) the right to
exchange options with exercise prices above $8 per share for restricted stock
units. The Compensation Committee believes that the restricted stock units
issued in the exchange offer serve as a more appropriate tool to retain and
motivate the holders of the restricted stock units than the out-of-the-money
options for which they were exchanged. In addition, the exchange offer
reduced the overhang associated with these options. We believe that equity
continues to be a strong tool for aligning the interests of our executive
team and our stockholders and that the combination of options, restricted
stock and restricted stock units held by our executive team contributes to
the achievement of that goal.
Chief Executive Officer Compensation
In June of 2003 Martha Stewart stepped down as our Chairman and Chief
Executive Officer. The position of CEO was filled by Sharon Patrick, the
Company's President and Chief Operating Officer.
Sharon Patrick
Ms. Patrick received a base salary of $850,746 in 2003, which was
increased to $900,000 per year, effective January 1, 2004. Ms. Patrick
received a bonus of $800,000 for 2003, which represents approximately 100%
of her target bonus for the year as adjusted to reflect the increase in her
responsibilities and base salary in June 2003. The Compensation Committee
believes that Ms. Patrick's meaningful ownership of MSO equity provides her
with significant incentives to maximize stockholder value. Ms. Patrick's
compensation for 2003 reflects the increase in Ms. Patrick's
responsibilities in June 2003 and her important contributions to
maintaining the stability of the Company and retaining key personnel in
2003, despite the impact of Ms. Stewart's personal legal situation and the
Company's performance in terms of revenue and operating results.
Martha Stewart
Ms. Stewart is compensated pursuant to her employment agreement with
MSO. The employment agreement became effective prior to the time of MSO's
initial public offering and provides for an annual salary of $900,000, as
well as bonuses payable upon the achievement of performance targets
established by the Compensation Committee, with a guaranteed minimum
payment of $300,000. The terms of Ms. Stewart's employment agreement were
established based on a number of considerations, including Ms. Stewart's
contribution to the company as its founder, her services as on-air talent
for MSO's television and radio programs, and her services as MSO's Chairman
and Chief Executive Officer. The Compensation Committee believes that Ms.
Stewart's compensation under her employment agreement and her considerable
ownership of MSO equity provide her with significant incentives to maximize
stockholder value. For 2003, after evaluating MSO's performance in terms of
revenue and operating results, Ms. Stewart was paid her guaranteed minimum
bonus of $300,000 plus an additional bonus of $200,000. The Compensation
Committee believes that the compensation of Ms. Stewart as Chief Executive
Officer should be heavily weighted to corporate performance and that the
reduced level of compensation paid to Ms. Stewart with respect to 2003
reflects that objective. Ms Stewart's bonus for 2003 is $180,000 less than
her bonus for 2002.
Tax Matters
Section 162(m) of the Internal Revenue Code limits the tax
deductibility by a company of compensation in excess of $1 million paid to
any of its five most highly compensated executive officers. However,
compensation which qualifies as performance-based is excluded from the
limit if, among other requirements, the compensation is payable only upon
attainment of pre-established, objective performance goals under a plan
approved by the stockholders. While it is the general objective of the
Compensation Committee to pay deductible compensation, we have awarded, and
reserve the right to award in the future, compensation that does not
qualify under Section 162(m) as deductible compensation upon a
determination that doing so is in the best interest of our stockholders. In
this regard, in 2003, the Compensation Committee adopted the 2003 key
executive bonus plan and approved the exchange offer notwithstanding that
compensation paid pursuant to these arrangements may not qualify under
Section 162(m) as deductible compensation.
Summary
The Compensation Committee believes that the present compensation
structure is one that is well-designed to attract and retain talented
executives and key employees, align these individuals' interests with those
of our stockholders, and maximize stockholder value, and believes that the
actions of the Compensation Committee with respect to 2003 executive
compensation were consistent with that focus. The Compensation Committee
periodically reviews MSO's compensation policies for executives and other
employees to ensure that they continue to best serve these objectives.
Members of the Compensation and Corporate Governance
Committee
Jeffrey W. Ubben
Arthur C. Martinez
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee makes all compensation decisions. The
Compensation Committee is composed of Messrs. Ubben and Martinez, each of
whom is a non-employee director. No interlocking relationship exists between
the Board or the Compensation Committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information, as of December 31, 2003,
relating to equity compensation plans of the Company pursuant to which
performance unit awards, restricted stock awards and other forms of
equity-based compensation, in addition to stock options and stock
appreciation rights, that may be granted from time to time.
EQUITY COMPENSATION PLAN INFORMATION
Number of
securities
remaining
available for
Number of future issuance
securities to be Weighted-average under equity
issued upon exercise price compensation
exercise of of outstanding plans (excluding
outstanding options, securities
options, warrants warrants and reflected in
Plan category and rights (a) rights (b) column (a)) (c)
Equity compensation
plans approved by
security holders: 2,815,214 $11.77 --
Equity compensation
plans not approved
by security holders:
Options -- -- --
Restricted Stock
Units 992,373 -- --
Total 3,807,587 -- 8,184,902*
* These represent the aggregate number of shares which may be issued in
connection with performance unit awards, restricted stock awards and other
forms of equity-based compensation, in addition to stock options and stock
appreciation rights, and thus are not allocable among specific plans.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents, as of April 7, 2004 (except for Time
Warner, Inc. and David Rocker, which information is presented as of the
most recent date such information was filed with the Securities and
Exchange Commission), information relating to the beneficial ownership of
our common stock by (1) each person known by us to own beneficially more
than 5% of the outstanding shares of either class of our common stock, (2)
each of our directors, (3) each of the Named Executives, and (4) all of our
current executive officers and directors as a group.
Unless another address is indicated, beneficial owners listed here may
be contacted at our corporate address. Under the rules of the Securities and
Exchange Commission, a person is deemed to be a beneficial owner of a
security if that person has or shares voting power, which includes the power
to vote or to direct the voting of such security, or investment power, which
includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be the beneficial owner of any
securities with respect to which that person has the right to acquire
beneficial ownership within 60 days. Under these rules, more than one person
may be deemed to be beneficial owner of the same securities. For each listed
person or entity, the information listed assumes the exercise of any options
exercisable by such person or entity on or prior to June 30, 2004, but not
the exercise of any options held by any other parties. Additionally, we have
assumed the conversion of shares of Class B Common Stock into shares of Class
A Common Stock for purposes of listing Ms. Stewart's ownership of Class A
Common Stock, but not in calculating the percentage of Class A Common Stock
for any other holder or for calculating Ms. Stewart's ownership of Class B
Common Stock. Shares of Class B Common Stock may be converted on a
one-for-one basis into shares of Class A Common Stock at the option of the
holder.
The percentage of votes for all classes is based on one vote for each
share of Class A Common Stock and ten votes for each share of Class B Common
Stock.
BENEFICIAL OWNERSHIP
Class B Common
Class A Common Stock Stock % Total
-------------------- ----------------- Voting
Name Shares % Shares % Power
- ---- --------- ------- ---------- ----- --------
Martha Stewart...... 30,002,845(1) 60.5 29,758,745 100 93.8(2)
VA Partners, L.L.C.. 4,228,306(3) 21.3 -- -- *
One Maritime Plaza,
Suite 1400
San Francisco, CA
94111 1,219,597(4) 6.2 -- -- *
Time Warner, Inc....
75 Rockefeller Plaza
New York, NY 10019
David Rocker........ 1,204,200(5) 6.1 -- -- *
c/o Rocker
Partners, L.P.
45 Rockefeller
Plaza, Suite 1759
New York, NY 10111
Arthur Martinez..... 27,853(6) * -- -- *
Sharon Patrick...... 2,291,433(7) 11.6 -- -- *
Thomas Siekman...... 6,866(8) * -- -- *
Bradley Singer...... 413(9) * -- -- *
Jeffrey Ubben....... 4,237,306(10) 21.4 -- -- *
James Follo......... 21,750(11) * -- -- *
Suzanne Sobel....... 49,195(12) * -- -- *
Lauren Stanich 38,986(13) * -- -- *
Gael Towey.......... 179,344(14) * -- -- *
All directors and
executive officers as
a group (13 persons) 6,929,996(15) 35.0 -- -- *
- ------------
* The percentage of shares or voting power beneficially owned does not
exceed 1%.
(1) Consists of 5,100 shares of Class A Common Stock held by Ms. Stewart,
14,000 shares of Class A Common Stock held by a partnership controlled
by Ms. Stewart (the "MS Partnership"), options held by Ms. Stewart to
acquire 225,000 shares of Class A Common Stock and 29,758,745 shares
of Class B Common Stock held by the MS Partnership, and excludes
unvested options to acquire 75,000 shares of Class A Common Stock.
(2) Assumes no shares of Class B Common Stock are converted into shares of
Class A Common Stock.
(3) VA Partners, L.L.C. beneficially owns 4,228,306 shares of Class A
Common Stock as general partner of ValueAct Capital Partners, L.P. and
ValueAct Capital Partners II, L.P., and as investment advisor of
ValueAct Capital International, Ltd. This information is based on
information filed with the Securities and Exchange Commission by VA
Partners, L.L.C. and ValueAct Capital Partners, L.P. as of April 5,
2004.
(4) Time Warner, Inc. beneficially owns these shares indirectly through
its ownership of Time Publishing Ventures, Inc., a wholly owned
indirect subsidiary of Time Warner, Inc. This information is based on
information filed with the Securities and Exchange Commission by Time
Warner, Inc. as of January 22, 2001.
(5) These shares consist of: (i) 831,883 shares owned by Rocker Partners,
L.P., a New York limited partnership; (ii) 342,715 shares owned by
Compass Holdings, Ltd., a company organized under the International
Business Companies Ordinance of the British Virgin Islands, and (iii)
29,602 shares owned by Helmsman Holdings, Ltd., a company organized
under the International Business Companies Ordinance of the British
Virgin Islands. David A. Rocker has sole voting and dispositive power
over the aggregate amount of 1,204,200 shares of Class A Common Stock
by virtue of his positions as (i) the sole managing partner of Rocker
Partners, L.P. and (ii) the president of Rocker Offshore Management
Company, Inc., the investment advisor to Compass Holdings, Ltd. and
Helmsman Holdings, Ltd. This information is based on information filed
with the Securities and Exchange Commission by David Rocker as of
February 13, 2004.
(6) Consists of 16,853 shares of Class A Common Stock and options to
acquire 11,000 shares of Class A Common Stock.
(7) Consists of 1,579,087 shares of Class A Common Stock and options held
by Ms. Patrick to acquire 712,346 shares of Class A Common Stock. This
amount excludes unvested options to acquire 140,000 shares of Class A
Common Stock.
(8) Consists of 6,866 shares of Class A Common Stock.
(9) Consists of 413 shares of Class A Common Stock.
(10) Consists of options to acquire 9,000 shares of Class A Common Stock,
4,228,306 shares of Class A Common Stock beneficially owned by VA
Partners, L.L.C. as general partner of ValueAct Capital Partners, L.P.
and ValueAct Capital Partners II, L.P. and as investment advisor of
ValueAct Capital International, Ltd. Mr. Ubben is attributed
beneficial ownership of these shares as a managing partner of VA
Partners, L.L.C., but disclaims beneficial ownership, except to the
extent of his pecuniary interest in each fund.
(11) Consists of 15,500 shares of Class A Common Stock and options to
acquire 6,250 shares of Class A Common Stock. Does not include
unvested options to acquire 18,750 shares of Class A Common Stock.
(12) Consists of 16,112 shares of Class A Common Stock and options to
acquire 33,083 shares of Class A Common Stock. Does not include
unvested options to aquire 18,750 shares of Class A Common Stock.
(13) Consists of 17,387 shares of our Class A common stock, of which 1,500
shares are held directly by Ms. Stanich's spouse, and options to
acquire 21,599 shares of Class A Common Stock, does not include
unvested options to acquire 18,750 shares of Class A common stock.
(14) Consists of 15,612 shares of Class A Common Stock and options to
acquire 163,732 shares of Class A Common Stock. This amount excludes
unvested options to acquire 18,750 shares of Class A Common Stock.
(15) Consists of 5,927,748 of our Class A Common Stock and options to
acquire 1,002,248 shares of Class A Common Stock, Does not include
unvested options to acquire 262,500 shares of Class A Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH TIME PUBLISHING VENTURES AND ITS AFFILIATES
Ongoing Service Agreements
In February 1997, Time Inc., Time Customer Service, Inc. ("TCS"), Oxmoor
House, Inc. and Time Distribution Services, Inc. ("TDS"), each an affiliate
of Time Publishing Ventures, Inc. ("TPV"), entered into agreements with us to
provide us with various services. We entered into these agreements in
connection with a transaction in which we acquired the assets relating to
TPV's Martha Stewart-related businesses, including the Martha Stewart Living
magazine and television program, from TPV. Through this transaction, TPV
became an affiliate of MSO by virtue of its acquisition of MSO equity. We
believe that the terms of these agreements, in the aggregate, are at least as
favorable to us as we would be able to obtain with unrelated third parties.
Under our newsstand distribution agreement, TDS provides newsstand
distribution services for our magazines. We compensate TDS on the basis of
net sales. This agreement expires in December 2007, but we have the right to
terminate commencing December 2004 on one year's notice. In 2003, we
incurred fees of $2.2 million under this agreement.
Under our fulfillment agreement with TCS, TCS provides inventory
management, back-office processing and processing of mail and phone orders
for our magazines. The fulfillment agreement expires in December 2005, but
is renewable at our option for an additional three-year term. The
fulfillment agreement with respect to our Internet/Direct Commerce businesses
was terminated in February 2002 upon our conversion to a new fulfillment
provider. In 2003, we incurred fees of approximately $8.8 million under this
agreement.
Under a services agreement with Time Inc., we receive administrative,
editing and sales services, as well as purchase our paper. These
administrative, editing and sales services automatically renew for six-month
or one-year periods, depending on the service. Subject to certain limited
exceptions, the paper purchasing portion of the agreement extends through the
end of 2004, provided that we may terminate the service on 180 days' written
notice. In 2003, we incurred expenses of approximately $20.9 million,
including $20.5 million for paper purchases, under this agreement.
Under our agreement with Oxmoor House, we granted Oxmoor House an
exclusive license to use the mark Martha Stewart Living in connection with
books and continuity card and binder programs. Under the agreement, we
generally produce two Best of Martha Stewart Living books and one Christmas
with Martha Stewart Living book each year. Oxmoor House also has the right
to publish other materials bearing the mark Martha Stewart Living as mutually
agreed by us and Oxmoor House. We receive production grants on a per page
basis for each of these publications, an annual payment to cover staff costs
and receive 50% of the net profit. We earned approximately $0.1 million in
income under this agreement in 2003. This agreement expires in December 2004.
AGREEMENTS WITH STOCKHOLDERS
Stockholders Agreement; TPV Share Buyback Agreement
Immediately prior to our initial public offering, we entered into a
stockholders agreement with the members of MSLO LLC. Under the terms of this
agreement, TPV, Ms. Stewart and Ms. Patrick have the right to require us to
register shares of our Class A Common Stock owned or controlled by them,
subject to customary terms and minimum amounts. Registration of these shares
of common stock will result in such shares becoming freely tradeable without
restriction under the Securities Act of 1933. We will bear all registration
expenses, other than any underwriting discounts, incurred in connection with
the above registrations. These registration rights continue as long as these
stockholders continue to hold any of our common stock that they received in
the merger of MSLO LLC into MSO.
As part of a February 18, 2000 agreement with TPV pursuant to which we
purchased 1,366,000 shares of our Class A Common Stock held by TPV, TPV
agreed to continue, subject to certain limited exceptions, to hold shares of
our Class A Common Stock until 2003, and to allow us to place advertisements
in Time Inc. magazines and websites through 2004 at discounted rates, subject
to annual limitations.
ValueAct Investment Agreement
On January 8, 2002, we entered into an investment agreement with
ValueAct Capital Partners, L.P. (and certain of its affiliates) ("ValueAct")
and the MS Partnership. ValueAct is an affiliate of Mr. Ubben. Under the
terms of the investment agreement, ValueAct has the right to require us on up
to three occasions to register certain shares of our Class A Common Stock
owned or controlled by it, subject to customary terms and minimum amounts.
Registration of these shares of common stock will result in such shares
becoming freely tradeable without restriction under the Securities Act of
1933. We will bear all registration expenses, other than any underwriting
discounts, incurred in connection with the above registrations.
Voting Agreement with Martha Stewart
Ms. Stewart entered into a voting agreement with the Company, dated
September 25, 2003, irrevocably committing to vote at the 2004 annual meeting
of stockholders for a specific proposal approving the exchange offer pursuant
to which certain employees of the Company exchanged certain options held by
them under the Company's Amended and Restated 1999 Stock Incentive Plan for
restricted stock units granted under the plan. The voting agreement
automatically terminates immediately following the earlier of (a) the
requisite approval by the Company's stockholders of the exchange offer
proposal having been obtained and (b) September 30, 2004.
TRANSACTIONS WITH MARTHA STEWART
Location Rental Agreement
We have entered into a location rental agreement with Ms. Stewart
relating to our use of various properties owned by her. We have historically
made extensive use of these properties for television filming and
photography, and also for research and development of content and products
and various other commercial purposes. The agreement provided for payments
of $2.5 million in 2003 to MS Real Estate Management Company, a company owned
by Ms. Stewart that operates Ms. Stewart's real estate and permits us to use
the properties currently owned by Ms. Stewart for any purpose relating to our
businesses. The agreement was scheduled to expire in October 2004. In
connection with Ms. Stewart's resignation as Chief Creative Officer and a
director of the Company in March 2004, the scheduled expiration date under
the agreement was amended to July 4, 2004. In the event that Ms. Stewart's
employment is terminated without cause, or she terminates employment for good
reason prior to the scheduled expiration date, we will be obligated to pay
the remaining amount due under the location rental agreement and we will lose
our access to these properties.
In 2003, Ms. Stewart reimbursed us approximately $223,000 for certain
services provided by our personnel, primarily in connection with MS Real
Estate Management Company.
Intellectual Property License Agreement
We have entered into an intellectual property license and preservation
agreement with Ms. Stewart that, as of the time of our initial public
offering, replaced a prior non-perpetual license agreement entered into in
February 1997. Under the terms of this new license agreement, Ms. Stewart
granted us an exclusive, worldwide, perpetual royalty-free license to use her
name, likeness, image, voice and signature for our products and services. We
are currently the owner of the primary trademarks employed in our business
and, under the license agreement, we generally have the right to develop and
register in our name trademarks that incorporate the Martha Stewart name,
such as Martha Stewart Living, and to use exclusively these marks in our
business. If Ms. Stewart ceases to control us, we will continue to have
those rights, including the right to use those marks for any new business as
long as such new business is substantially consistent with the image, look
and goodwill of the licensed marks at the time that Ms. Stewart ceases to
control us. In connection with the changes in Ms. Stewart's position and
responsibilities in June 2003 and March 2004, Ms. Stewart agreed that these
changes would not be deemed to constitute a cessation of control for purposes
of the license agreement.
In the event that we terminate Ms. Stewart's employment without cause or
she terminates her employment for good reason, each as defined in her
employment agreement, the license will cease to be exclusive and we will be
limited in our ability to create new marks incorporating her name, likeness,
image, publicity and signature. In these circumstances, Ms. Stewart would
receive the right to use her name in other businesses that could directly
compete with us, including our magazine, television and merchandising
businesses. In addition, if Ms. Stewart's employment terminates under these
circumstances, Ms. Stewart would receive in perpetuity a royalty of 3% of the
revenues we derive from any of our products or services bearing any of the
licensed marks. The intellectual property license agreement contains various
customary provisions regarding our obligations to preserve the quality of the
licensed marks and to protect these marks from infringement by third
parties. The term of the license is perpetual; however, Ms. Stewart may
terminate the license if we fail to make the royalty payments described above.
Split-Dollar Life Insurance Agreement with Ms. Stewart
In February 2001, we entered into an agreement with Ms. Stewart and the
MS Partnership pursuant to which we agreed to pay a significant portion of
the annual premiums on a whole life insurance policy insuring Ms. Stewart and
owned by and benefiting the MS Partnership. We will be repaid the cumulative
premium payments made by us under the arrangement out of the existing cash
surrender value of the policy at the earlier of Ms. Stewart's death or the
voluntary termination of the arrangement by Ms. Stewart. If the arrangement
lasts longer than sixteen years, we will no longer be obligated to make
premium payments and will receive interest on the cumulative premiums paid by
us to date until the time such premiums are repaid to us. Premium payments
made by us under this arrangement in 2002 were approximately $1.1 million.
In 2003, Ms. Stewart agreed that we would no longer be obligated to make
premium payments under this agreement unless recent legislation is clarified
to permit such further payments.
OTHER RELATIONSHIPS
Ms. Margaret Christiansen, Ms. Stewart's sister-in-law, is a Senior Vice
President, Business Manager of MSO and received $181,054 as compensation in
2003. Mr. Randy Plimpton, Ms. Stewart's brother-in-law, is our property
manager, responsible for MSO property management and support services and
received $120,512 as compensation in 2003. Ms. Laura Plimpton, Ms. Stewart's
sister, is a staff writer for our radio programs and received $82,934 as
compensation in 2003.
From time to time we use the services of a law firm of which Ms.
Stewart's son-in-law was a partner. We paid an aggregate of approximately
$91,000 in fees and expenses for such services in 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES TO INDEPENDENT AUDITORS FOR FISCAL 2003 AND 2002
The following table presents fees for professional services rendered
by Ernst & Young, LLP for the audit of the Company's annual financial
statements for fiscal 2003 and fiscal 2002 and the reviews of the financial
statements included in the Company's Quarterly Reports or Form 10-Q for
those years, and fees billed for audit-related services, tax services and
all other services rendered by Ernst & Young, LLP for fiscal 2003 and
fiscal 2002.
Fiscal 2003 Fiscal 2002
----------- -----------
(1) Audit fees $325,000 $500,000
(2) Audit-related fees (a) 29,900 46,500
(3) Tax fees (b) 394,769 184,749
(4) All other fees (c) 21,300 165,000
(a) Principally for audits of the financial statements of the Company's
401(k) employee benefit plan and other miscellaneous accounting and
auditing matters.
(b) Principally for preparation of corporate income tax, tax audits and
miscellaneous tax matters.
(c) Principally for corporate governance - related policy and
implementation of certain new accounting rules for intangible assets.
All audit-related services, tax services and other services were
pre-approved by the Audit Committee, which concluded that the provision of
such services by Ernst & Young, LLP was compatible with the maintenance of
that firm's independence in the conduct of its auditing functions. The Audit
Committee's Audit and Non-Audit Services Pre-Approval Policy provides for
pre-approval of audit, audit-related and tax services specifically described
by the Audit Committee on an annual basis and, in addition, individual
engagements anticipated to exceed pre-established thresholds must be
separately approved. The policy also requires specific approval by the Audit
Committee if total fees for audit-related and tax services would exceed total
fees for audit services in any fiscal year. The policy authorizes the Audit
Committee to delegate to one or more of its members pre-approval authority
with respect to permitted services.
CHANGE IN CERTIFYING ACCOUNTANT
On May 7, 2002 we dismissed our independent auditors, Arthur Andersen
LLP and engaged the services of Ernst & Young, LLP as our new independent
auditors for our fiscal year ending December 31, 2002. Our Audit Committee
authorized the dismissal of Arthur Andersen LLP and the engagement of Ernst &
Young, LLP.
Arthur Andersen LLP's reports on our consolidated financial statements
for each of the years ended December 31, 2001 and 2000 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001 and 2000, and the subsequent
interim period through May 7, 2002, there were no disagreements between us
and Arthur Andersen on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreements, if not resolved to Arthur Andersen LLP's satisfaction, would
have caused Arthur Andersen LLP to make reference to the subject matter of
the disagreement in connection with its report on our consolidated financial
statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K under the Securities Act of 1933 and the
Securities Exchange Act of 1934.
During the years ended December 31, 2001 and 2000 and the subsequent
interim period through May 7, 2002, we did not consult with Ernst & Young,
LLP with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements, or any other
matters or reportable events (as defined in Item 304(a(1)(v) of Regulation
S-K) as set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Sharon Patrick
------------------------------------------
Name: Sharon Patrick
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE
- ------------------------- -----------------------------------------
/s/ Sharon Patrick President, Chief Executive Officer and
- ------------------------- Director (Principal Executive Officer)
Sharon Patrick
Chief Financial and Administrative
/s/ James Follo Officer (Principal Financial and
- ------------------------- Accounting Officer)
James Follo
/s/ Arthur C. Martinez
- ------------------------- Director
Arthur C. Martinez
/s/ Thomas C. Siekman
- ------------------------- Director
Thomas C. Siekman
/s/ Bradley E. Singer
- ------------------------- Director
Bradley E. Singer
/s/ Jeffrey W. Ubben
- ------------------------- Chairman of the Board and Director
Jeffrey W. Ubben
Each of the above
signatures is affixed as
of April 29, 2004.
EXHIBIT INDEX
The following is a list of all exhibits filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
31.1 Certification of Annual Report on Form 10-K/A for the year
ended December 31, 2003, by Sharon Patrick, Chief
Executive Officer of Martha Stewart Living Omnimedia,
Inc., under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Annual Report on Form 10-K/A for the year
ended December 31, 2003, by James Follo, Chief Financial
and Administrative Officer of Martha Stewart Living
Omnimedia, Inc., under Section 302 of the Sarbanes-Oxley
Act of 2002.