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, 2003
Commission file number 001-15395
Martha Stewart Living Omnimedia, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2187059
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11 West 42nd Street, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 827-8000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 10, 2003
Class A, $0.01 par value 19,562,402
Class B, $0.01 par value 30,058,975
----------
Total 49,621,377
==========
Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q
Page
----
Part I. Financial information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
September 30, December 31,
2003 2002
--------- ---------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 141,666 $ 131,664
Short-term investments 33,730 47,286
Accounts receivable, net 25,958 37,796
Inventories, net 9,666 8,654
Deferred television production costs 4,060 4,179
Income taxes receivable 5,334 --
Deferred income taxes 7,028 7,028
Other current assets 5,874 4,756
--------- ---------
TOTAL CURRENT ASSETS 233,316 241,363
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 26,217 31,288
INTANGIBLE ASSETS, net 44,257 44,257
DEFERRED INCOME TAXES 2,827 2,827
OTHER NONCURRENT ASSETS 4,575 4,807
--------- ---------
TOTAL ASSETS $ 311,192 $ 324,542
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 38,290 $ 40,517
Accrued payroll and related costs 9,243 9,385
Income taxes payable -- 323
Current portion of deferred subscription income 22,744 24,932
--------- ---------
TOTAL CURRENT LIABILITIES 70,277 75,157
DEFERRED SUBSCRIPTION INCOME 6,653 7,715
OTHER NONCURRENT LIABILITIES 4,454 5,035
--------- ---------
TOTAL LIABILITIES 81,384 87,907
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000 shares authorized; 19,517
and 19,342 shares outstanding in 2003
and 2002, respectively 195 194
Class B common stock, $.01 par value, 150,000 shares
authorized; 30,059 and 30,295 outstanding in 2003 and 2002,
respectively 301 303
Capital in excess of par value 181,705 181,629
Unamortized restricted stock (480) (993)
Retained earnings 48,862 56,277
--------- ---------
230,583 237,410
Less: Class A treasury stock - 59 shares at cost (775) (775)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 229,808 236,635
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 311,192 $ 324,542
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements
(unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- --------- ---------
REVENUES
Publishing $ 29,147 $ 46,515 $ 102,825 $ 136,932
Television 6,579 6,362 19,782 20,323
Merchandising 8,852 10,060 30,943 37,110
Internet/Direct Commerce 6,602 7,994 21,436 23,127
-------- -------- --------- ---------
TOTAL REVENUES 51,180 70,931 174,986 217,492
-------- -------- --------- ---------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 31,212 38,853 101,255 115,005
Selling and promotion 12,047 11,073 39,647 33,411
General and administrative 12,216 13,689 40,218 36,715
Depreciation and amortization 1,885 2,841 6,080 8,976
-------- -------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES 57,360 66,456 187,200 194,107
-------- -------- --------- ---------
OPERATING INCOME (LOSS) (6,180) 4,475 (12,214) 23,385
Interest income, net 293 545 1,090 1,603
-------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,887) 5,020 (11,124) 24,988
Income tax benefit (provision) 2,169 (2,058) 4,353 (10,245)
-------- -------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS
FROM DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (3,718) 2,962 (6,771) 14,743
Loss from discontinued operations, net of tax
benefit (122) (197) (644) (2,336)
-------- -------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (3,840) 2,765 (7,415) 12,407
Cumulative effect of accounting change, net of tax
benefit -- -- -- (3,137)
-------- -------- --------- ---------
NET INCOME (LOSS) $ (3,840) $ 2,765 $ (7,415) $ 9,270
======== ======== ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Income Statements (continued)
(unaudited, in thousands, except per share amounts)
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
Income (loss) from continuing operations $ (0.08) $ 0.06 $ (0.14) $ 0.30
---------- ---------- ---------- ----------
Loss from discontinued operations (0.00) (0.00) (0.01) (0.05)
---------- ---------- ---------- ----------
Cumulative effect of accounting change -- -- -- (0.06)
Net income (loss) $ (0.08) $ 0.06 $ (0.15) $ 0.19
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 49,537 49,209 49,553 49,050
---------- ---------- ---------- ----------
Diluted 49,537 49,316 49,553 49,205
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-5-
Martha Stewart Living Omnimedia, Inc.
Consolidated Statement of Shareholders' Equity
For the Nine Months Ended September 30, 2003
(unaudited, in thousands)
Capital in
Class A Class B Excess of Unamortized Class A
Common Stock Common Stock Par Restricted Retained Treasury stock
Shares Amount Shares Amount Value Stock Earnings Shares Amount Total
------ ------ ------ ------ ----- ----- -------- ------ ------ -----
Balance at 19,342 $ 194 30,295 $ 303 $181,629 $ (993) $56,277 (59) $ (775) $236,635
January 1,
2003
Net loss for
the
period - - - - - - (7,415) - - (7,415)
Issuance of
shares for
stock option
exercises 190 1 - - 176 - - - - 177
Shares returned
on net treasury
basis - - (236) (2) 2 - - - - -
Return of
restricted
stock (15) - - - (102) 102 - - - -
Amortization of
restricted stock - - - - - 411 - - - 411
------ ----- ------ ----- -------- ------ ------- --- ------ --------
Balance at
September 30,
2003 19,517 $ 195 30,059 $ 301 $181,705 $ (480) $ 48,862 (59) $ (775) $229,808
====== ===== ====== ===== ======== ====== ======= === ====== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-6-
Martha Stewart Living Omnimedia, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended
September 30,
------------------------
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,415) $ 9,270
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change -- 3,137
Depreciation and amortization 6,080 8,976
Amortization of restricted stock 411 --
Changes in operating assets and liabilities (1,799) 7,559
--------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,723) 28,942
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,008) (3,452)
Purchases of short-term investments -- (42,392)
Sales of short-term investments 13,556 31,200
--------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,548 (14,644)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from stock option exercises 177 4,041
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 177 4,041
--------- --------
NET INCREASE IN CASH 10,002 18,339
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 131,664 68,076
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 141,666 $ 86,415
========= ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-7-
Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data)
1. Accounting policies
a. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein
referred to as the "Company."
The information included in the foregoing interim condensed consolidated
financial statements is unaudited. In the opinion of management, all adjustments
which are of a normal recurring nature and necessary for a fair presentation of
the results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year. These condensed
consolidated financial statements are unaudited and should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
with respect to its fiscal year ended December 31, 2002.
b. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Management does not expect
such differences to have a material effect on the Company's consolidated
financial statements.
c. Income taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS 109,
deferred assets and liabilities are recognized for the future costs and benefits
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
d. Reclassifications
The prior year periods have been restated to reflect as discontinued operations
the results of the operations discussed in Note 5.
e. Intangible assets
Commencing January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to an
annual assessment for impairment by applying a fair-value based test. The
Company completed the initial impairment tests in the second quarter of 2002
which resulted in a charge of $5,039 ($3,137 net of income taxes) to reduce the
carrying value of its goodwill related to The Wedding List. In accordance with
the SFAS 142 transition rules, we have presented these amounts in the first
quarter of 2002. The remaining intangible assets represent goodwill of the
Publishing segment and its fair value exceeds the carrying value.
-8-
f. Stock Compensation
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation," the Company has elected to continue
accounting for employee stock compensation under the APB 25 rules, but disclose
pro forma results using SFAS No. 123's alternative accounting treatment, which
calculates the total compensation expense to be recognized as the fair value of
the award at the date of grant. The fair value of options granted were estimated
on the grant date using the Black-Scholes option pricing model, using the
following assumptions for the three month period ended September 30, :
2003 2002
-------- -------
risk-free interest rates 3.60% 4.11%
dividend yields zero zero
expected volatility 140% 134%
expected option life 6 years 6 years
average fair market value
per option granted $ 7.38 $ 6.30
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 income (loss), as reported for the three and nine month
periods ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2003 2002 2003 2002
------- ------- -------- -------
Net income (loss), as reported $(3,840) $ 2,765 $ (7,415) $ 9,270
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (2,535) (2,464) (7,594) (7,072)
------- ------- -------- -------
Pro forma net income (loss) $(6,375) $ 301 $(15,009) $ 2,198
======= ======= ======== =======
Income (loss) per share:
Basic and diluted - as reported $ (0.08) $ 0.06 $ (0.15) $ 0.19
Basic and diluted - pro forma $ (0.13) $ 0.01 $ (0.31) $ 0.04
-9-
2. Inventories
The components of inventories are as follows:
September 30, December 31,
2003 2002
------------- -----------
Paper $ 5,774 $ 4,861
Product merchandise 7,156 8,887
------- -------
12,930 13,748
Less: reserve for obsolete and
excess inventory 3,264 5,094
------- -------
$ 9,666 $ 8,654
======= =======
3. Earnings (loss) per share
Earnings (loss) per share are computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings (loss) per share are calculated by dividing
net income (loss) by the weighted-average number of common shares outstanding
during each period. Diluted earnings (loss) per share include the determinants
of basic earnings (loss) per share and, in addition, give effect to potentially
dilutive common shares.
4. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business segments are
Publishing, Television, Merchandising and Internet/Direct Commerce. The
Publishing segment primarily consists of the Company's magazine operations, and
also those related to its book, radio and newspaper businesses. The Television
segment consists of the Company's television production operations that produce
television programming that airs in syndication in the United States and on
cable in the United States, Canada and Japan. The Merchandising segment
primarily consists of the Company's operations related to the design of
merchandise and related promotional and packaging materials that are distributed
by its retail and manufacturing partners under Company trademarks in exchange
for royalty income. The Internet/Direct Commerce segment comprises the Company's
operations relating to its catalog, Martha Stewart: The Catalog For Living, and
the website marthastewart.com.
The following presents segment and consolidated financial information for the
three and nine month periods ended September 30, 2003 and 2002, including a
reconciliation of operating income, a GAAP measure, and Operating Income before
Depreciation and Amortization (OIDA), a non-GAAP measure. The Company believes
OIDA is an appropriate measure when evaluating the operating performance of its
business segments and the Company on a consolidated basis. OIDA is used
externally by the Company's investors, analysts, and industry peers. OIDA is
among the primary metrics used by management for planning and forecasting of
future periods, and is considered an important indicator of the operational
strength of the Company's businesses. The Company believes the presentation of
this measure is relevant and useful for investors because it allows investors to
view performance in a manner similar to the method used by the Company's
management and makes it easier to compare the Company's results with other
companies that have different capital structures or tax rates. The Company
believes OIDA should be considered in addition to, not as a substitute for,
operating income (loss), net income (loss), cash flows, and other measures of
financial performance prepared in accordance with generally accepted accounting
principles ("GAAP"). As OIDA is not a measure of performance calculated in
accordance with GAAP, this measure may not be comparable to similarly titled
measures employed by other companies. In order to reconcile OIDA to operating
income, depreciation and amortization are added back to operating income.
-10-
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
OPERATING INCOME (LOSS)
Publishing $ 1,395 $ 15,295 $ 15,702 $ 47,038
Television (34) 1,117 195 2,409
Merchandising 4,561 6,037 19,406 25,826
Internet/Direct Commerce (1,970) (6,660) (14,775) (21,478)
-------- -------- -------- --------
Operating Income before Corporate
Overhead 3,952 15,789 20,528 53,795
Corporate Overhead (10,132) (11,314) (32,742) (30,410)
-------- -------- -------- --------
TOTAL OPERATING INCOME (LOSS) (6,180) 4,475 (12,214) 23,385
-------- -------- -------- --------
DEPRECIATION AND AMORTIZATION
Publishing 41 40 123 119
Television 236 417 1,015 1,287
Merchandising 168 158 503 475
Internet/Direct Commerce 235 741 727 2,121
Corporate Overhead 1,205 1,485 3,712 4,974
-------- -------- -------- --------
TOTAL DEPRECIATION AND AMORTIZATION 1,885 2,841 6,080 8,976
-------- -------- -------- --------
OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND
AMORTIZATION
Publishing 1,436 15,335 15,825 47,157
Television 202 1,534 1,210 3,696
Merchandising 4,729 6,195 19,909 26,301
Internet/Direct Commerce (1,735) (5,919) (14,048) (19,357)
-------- -------- -------- --------
Operating Income before Depreciation and
Amortization and before Corporate
Overhead 4,632 17,145 22,896 57,797
Corporate Overhead (8,927) (9,829) (29,030) (25,436)
-------- -------- -------- --------
TOTAL OPERATING INCOME (LOSS)
BEFORE DEPRECIATION AND
AMORTIZATION $ (4,295) $ 7,316 $ (6,134) $ 32,361
======== ======== ======== ========
-11-
5. Discontinued Operations
In June 2002, the Company decided to exit The Wedding List, a wedding registry
and gift business that was reported within the Internet/Direct Commerce business
segment. All prior period financial statements were restated to report the
operations as a discontinued operation.
Summary operating results for The Wedding List were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ---------------------
2003 2002 2003 2002
----- ----- ------- -------
Revenues $ (55) $ 727 $ 526 $ 1,978
----- ----- ------- -------
Operating loss before income tax benefit (202) (334) (1,025) (3,960)
----- ----- ------- -------
Loss from discontinued operations, net of tax
benefit $(122) $(197) $ (644) $(2,336)
===== ===== ======= =======
6. Supplemental cash flow information:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Cash paid for interest - $ 41 $ 15 $ 140
Cash paid for income taxes - 385 1,529 4,614
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart
Living Omnimedia, Inc., and its subsidiaries.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Three Months Ended
September 30,
-----------------------
2003 2002
-------- --------
REVENUES
Publishing $ 29,147 $ 46,515
Television 6,579 6,362
Merchandising 8,852 10,060
Internet/Direct Commerce 6,602 7,994
-------- --------
TOTAL REVENUES 51,180 70,931
-------- --------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 31,212 38,853
Selling and promotion 12,047 11,073
General and administrative 12,216 13,689
Depreciation and amortization 1,885 2,841
-------- --------
TOTAL OPERATING COSTS AND EXPENSES 57,360 66,456
-------- --------
OPERATING INCOME (LOSS) (6,180) 4,475
Interest income, net 293 545
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (5,887) 5,020
Income tax benefit (provision) 2,169 (2,058)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS
FROM DISCONTINUED OPERATIONS (3,718) 2,962
-------- --------
Loss from discontinued operations, net of tax
benefit (122) (197)
-------- --------
NET INCOME (LOSS) $ (3,840) $ 2,765
======== ========
-13-
Revenues. Total revenues decreased $19.8 million, or 27.8%, to $51.2 million for
the quarter ended September 30, 2003, from $70.9 million for the quarter ended
September 30, 2002. Publishing revenues decreased $17.4 million, or 37.3%, to
$29.1 million for the quarter ended September 30, 2003, from $46.5 million for
the quarter ended September 30, 2002. This decrease was primarily due to lower
advertising revenues of $14.0 million and lower circulation revenues of $2.0
million. The decrease in advertising revenues resulted primarily from fewer
advertising pages in Martha Stewart Living, as well as the shift in the
publication schedule of one issue of Martha Stewart Weddings out of the third
quarter and into the second quarter, lower advertising rates in Martha Stewart
Living, and the publication of one fewer Special Interest Publication. These
declines were partially offset by advertising revenues related to our new
publication, Everyday Food. The decrease in circulation revenues primarily
resulted from lower subscription revenues from Martha Stewart Living magazine,
as well as the change in the publication schedule of Martha Stewart Weddings
referred to above, partially offset by circulation revenue from Everyday Food.
Television revenues increased $0.2 million, or 3.4%, to $6.6 million for the
quarter ended September 30, 2003, from $6.4 million for the quarter ended
September 30, 2002. Revenue from our syndicated daily show was flat in the
quarter, with lower license fee revenue offset by higher syndicated advertising
revenue. The higher syndicated advertising revenue was due to an adjustment to
the audience under delivery reserve related to prior seasons. Merchandising
revenues decreased $1.2 million, or 12.0%, to $8.9 million for the quarter ended
September 30, 2003, from $10.1 million for the quarter ended September 30, 2002,
primarily as a result of lower sales of Martha Stewart Everyday branded products
at Kmart, resulting in a decrease in royalty revenue of $1.0 million principally
due to Kmart store closings, partially offset by an increase in our royalty rate
and higher same store sales. The royalty rate under our agreement with Kmart
increased 9% on February 1, 2003. Revenue from Kmart represented approximately
85% of total segment revenue in the quarter. Royalty revenues from sales of
products at Zellers in Canada was zero in the current period due to the early
2003 expiration of our licensing agreement. Revenue from Zellers in the prior
year's period was $0.3 million. In September 2003, we began selling Martha
Stewart Everyday products in Canada through an agreement with Sears Canada.
These decreases were partially offset by an increase in royalties of $0.3
million earned from sales of Martha Stewart Signature products. Kmart emerged
from bankruptcy on May 6th, 2003. While operating under Chapter 11 of the
Federal Bankruptcy Code, Kmart closed 283 stores in 2002 and an additional 316
stores in 2003. The Company has recognized royalty revenues earned under our
agreement with Kmart based upon actual royalties earned, not contractual minimum
amounts. Contractual minimum amounts under our agreement with Kmart are computed
on January 31st annually each year and paid shortly thereafter. The Company
currently expects earned royalties, which are paid quarterly, to be below the
annual minimum amount. We expect to recognize the difference between the minimum
royalty amount and royalties paid on actual sales in the fourth quarter of 2003,
when the amount can be determined. Internet/Direct Commerce revenues decreased
$1.4 million, or 17.4%, to $6.6 million for the quarter ended September 30,
2003, from $8.0 million for the quarter ended September 30, 2002. The decline
was attributable to lower advertising revenue of $0.7 million, and lower
commerce sales of $0.7 million resulting principally from lower catalog
circulation, partially offset by higher online conversion rates.
Magazine Publication Schedule
Third Quarter 2003 Third Quarter 2002
------------------ ------------------
Martha Stewart Living Three Issues Three Issues
Martha Stewart Weddings No Issue One Issue
Everyday Food Two Issues No Issue
Special Interest Publications One Issues Two Issues
Production, distribution and editorial. Production, distribution and editorial
expenses decreased $7.6 million, or 19.7%, to $31.2 million for the quarter
ended September 30, 2003, from $38.9 million for the quarter ended September 30,
2002. Publishing segment costs decreased $4.5 million primarily due to lower
paper, printing and distribution costs resulting from fewer pages printed in the
quarter. The reduction in printed pages was primarily attributed to fewer pages
printed in Martha Stewart Living magazine, as well as the publication of one
fewer Special Interest Publication and the shift in publication of Martha
Stewart Weddings from the third quarter into the second quarter. This reduction
was partially offset by costs associated with the publication of two issues of
Everyday Food. Television segment costs increased $1.4 million, principally
related to higher production costs recognized in the period due to higher
staffing costs and the prior year benefit of extending a cable television
programming agreement which resulted in the recognition of less production costs
in the period. Internet/Direct Commerce costs decreased $4.8 million, due to
lower cost of goods sold resulting from improved gross margins and the
successful disposition of previously written down obsolete and slow moving
inventory. The decrease also resulted from lower catalog production costs due to
lower circulation in the period, as well as the continued benefit of the first
quarter 2003
-14-
restructuring, which reduced headcount and lowered technology costs.
Selling and promotion. Selling and promotion expenses increased $1.0 million, or
8.8%, to $12.0 million for the quarter ended September 30, 2003, from $11.1
million for the quarter ended September 30, 2002. Publishing segment costs
increased $1.1 million, or 11.2%, resulting primarily from marketing and
circulation costs relating to Everyday Food, partially offset by lower
circulation spending related to Martha Stewart Living.
General and administrative. General and administrative expenses decreased $1.5
million, or 10.8%, to $12.2 million for the quarter ended September 30, 2003,
from $13.7 million for the quarter ended September 30, 2002. Corporate costs
decreased $1.1 million, or 10.8%, principally resulting from lower legal
expenses resulting from corporate matters associated with various investigations
related to a personal sale of non-Company stock by Martha Stewart, a Director of
the Company and its Chief Creative Officer. A substantial portion of legal
expenses we are incurring related to these matters are now covered by insurance.
This decrease was partially offset by higher compensation and insurance costs.
Internet/Direct Commerce segment costs decreased $0.5 million primarily as a
result of lower headcount.
Depreciation and amortization. Depreciation and amortization decreased $1.0
million, or 33.7%, to $1.9 million for the quarter ended September 30, 2003,
from $2.8 million for the quarter ended September 30, 2002. The decrease is
primarily due to lower depreciation associated with the Company's website, which
was written down by $6.1 million in the fourth quarter of 2002 in connection
with a restructuring of the Internet/Direct Commerce segment.
Interest income, net. Interest income, net, was $0.3 million for the quarter
ended September 30, 2003, compared with $0.5 million for the quarter ended
September 30, 2002. Higher average cash balances throughout the quarter were
more than offset by lower interest yields on cash and short-term investments.
Income tax benefit (provision). Income tax benefit for the quarter ended
September 30, 2003 was $2.2 million, representing a 36.8% effective income tax
rate, compared to an income tax provision of $2.1 million representing an
effective income tax rate of 41.0% for the quarter ended September 30, 2002. The
effective income tax rate in the current quarter of 2003 reflects a federal tax
rate of 35%, without giving benefit to state income tax carry-backs, but
allowing for the benefit of certain book-tax differences. State income tax
benefits available to the Company resulting from the carry-back of losses to
prior years is limited. Accordingly, the Company has not recognized any state
tax benefit for the quarter ended September 30, 2003. Furthermore, no tax
benefit has been assumed for state and local loss carry-forwards to future
periods.
Loss from discontinued operations. Loss from discontinued operations was $0.1
million (net of tax) for the quarter ended September 30, 2003, compared to $0.2
million (net of tax) from the same operations for the quarter ended September
30, 2002. Discontinued operations represent the operations of the Wedding List,
which the Company discontinued in 2002. The current period expenses are
primarily facility related.
Net Income (Loss). Net loss was $(3.8) million for the quarter ended September
30, 2003, compared to a net income of $2.8 million for the quarter ended
September 30, 2002, as a result of the above mentioned factors.
-15-
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
2003 2002
--------- ---------
REVENUES
Publishing $ 102,825 $ 136,932
Television 19,782 20,323
Merchandising 30,943 37,110
Internet/Direct Commerce 21,436 23,127
--------- ---------
TOTAL REVENUES 174,986 217,492
--------- ---------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 101,255 115,005
Selling and promotion 39,647 33,411
General and administrative 40,218 36,715
Depreciation and amortization 6,080 8,976
--------- ---------
TOTAL OPERATING COSTS AND EXPENSES 187,200 194,107
--------- ---------
OPERATING INCOME (LOSS) (12,214) 23,385
Interest income, net 1,090 1,603
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (11,124) 24,988
Income tax benefit (provision) 4,353 (10,245)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE LOSS
FROM DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (6,771) 14,743
--------- ---------
Loss from discontinued operations, net of tax
benefit (644) (2,336)
--------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (7,415) 12,407
Cumulative effect of accounting change, net
of tax benefit -- (3,137)
--------- ---------
NET INCOME (LOSS) $ (7,415) $ 9,270
========= =========
-16-
Revenues. Total revenues decreased $42.5 million, or 19.5%, to $175.0 million
for the nine months ended September 30, 2003, from $217.5 million for the nine
months ended September 30, 2002. Publishing revenues decreased $34.1 million, or
24.9%, to $102.8 million for the nine months ended September 30, 2003, from
$136.9 million for the nine months ended September 30, 2002. This decrease was
primarily due to lower advertising revenues of $26.7 million, lower circulation
revenues of $5.2 million and decreased revenues from our book business of $2.1
million. The decrease in advertising revenue resulted primarily from fewer
advertising pages in Martha Stewart Living, as well as lower advertising
revenues from Special Interest Publications, and lower advertising rates in
Martha Stewart Living. These declines were partially offset by advertising
revenues related to a new publication, Everyday Food. The decrease in
circulation revenues primarily resulted from lower newsstand and subscription
revenues from Martha Stewart Living magazine, partially offset by circulation
revenues from Everyday Food magazine. Television revenues decreased $0.5
million, or 2.7%, to $19.8 million for the nine months ended September 30, 2003,
from $20.3 million for the nine months ended September 30, 2002. The decrease is
primarily attributable to lower licensing fees from our syndicated daily program
of $0.7 million. Additionally, the loss of the company's airtime on CBS The
Early Show contributed to an additional $0.4 million decline. This reduction was
partially offset by higher cable revenues of $0.8 million under existing
licensing agreements. The segment also benefited from an adjustment to the
audience under delivery reserve of the nationally syndicated daily show, related
to prior seasons. Merchandising revenues decreased $6.2 million, or 16.6%, to
$30.9 million for the nine months ended September 30, 2003, from $37.1 million
for the nine months ended September 30, 2002, primarily as a result of lower
sales of Martha Stewart Everyday branded products at Kmart resulting in a
decrease in royalty revenue of $6.6 million, principally due to store closings,
as well as the elimination of live plants in the Martha Stewart Everyday Garden
Line at Kmart and lower same store sales, partially offset by an increase in
royalty rate in the current period. The royalty rate under our agreement with
Kmart increased 9% on February 1, 2003. Revenue from Kmart represented
approximately 85% of total segment revenue for the nine months ended September
30, 2003. Royalty revenues from sales of products at Zellers in Canada was zero
in the current period due to the early 2003 expiration of our licensing
agreement. Revenue from Zellers in the prior year period was $0.9 million. In
September 2003, we began selling Martha Stewart Everyday products in Canada
through an agreement with Sears Canada. These decreases were partially offset by
an increase in royalties of $1.5 million earned from sales of Martha Stewart
Signature products. Kmart emerged from bankruptcy on May 6th, 2003. While
operating under Chapter 11 of the Federal Bankruptcy Code, Kmart closed 283
stores in 2002 and an additional 316 stores in 2003. The Company has recognized
royalty revenues earned under our agreement with Kmart based upon actual
royalties earned, not contractual minimum amounts. Contractual minimum amounts
under our agreement with Kmart are computed on January 31st annually each year
and paid shortly thereafter. The Company currently expects earned royalties,
which are paid quarterly, to be below the annual minimum amount. We expect to
recognize the difference between the minimum royalty amount and royalties paid
on actual sales in the fourth quarter of 2003, when the amount can be
determined. Internet/Direct Commerce revenues decreased $1.7 million, or 7.3%,
to $21.4 million for the nine months ended September 30, 2003, from $23.1
million for the nine months ended September 30, 2002 due to lower advertising
revenue.
Magazine Publication Schedule
Nine month period ended September 30
2003 2002
---- ----
Martha Stewart Living Nine Issues Nine Issues
Martha Stewart Weddings Two Issues Two Issues
Everyday Food Six Issues None
Special Interest Publications Five Issues Five Issues
Production, distribution and editorial. Production, distribution and editorial
expenses decreased $13.8 million, or 12.0%, to $101.3 million for the nine
months ended September 30, 2003, from $115.0 million for the nine months ended
September 30, 2002. Internet/Direct Commerce costs decreased $7.1 million.
Reduced costs in the segment reflect lower cost of goods sold of $3.0 million
due to improved margins and the successful disposition of previously written
down obsolete and slow moving inventory, lower fulfillment costs of $2.1
million, and the continued benefit of the first quarter restructuring which
reduced headcount and lowered technology costs. This was partially offset by
higher catalog production costs expensed in the period of $1.1 million.
Publishing segment costs decreased $6.9 million primarily reflecting lower
paper, printing and distribution costs of Martha Stewart Living magazine, due
mainly to lower number of pages printed per issue, partially offset by the
additional costs associated with the addition of six issues of Everyday Food, as
well as lower costs of $0.8 million associated with our book business.
-17-
Merchandising costs decreased $1.2 million or 16.5% due to good cost control.
Television costs increased $1.2 million, or 9.2%, principally due to higher
production costs recognized in the period due to higher staffing costs and the
prior year benefit of extending a cable television programming agreement which
resulted in the recognition of less production costs in the period.
Selling and promotion. Selling and promotion expenses increased $6.2 million, or
18.7%, to $39.6 million for the nine months ended September 30, 2003, from $33.4
million for the nine months ended September 30, 2002. Publishing segment costs
increased $3.5 million, or 11.5%, resulting primarily from circulation
acquisition costs relating to Everyday Food, partially offset by lower spending
related to Martha Stewart Living magazine. Merchandising segment costs increased
$1.2 million due to marketing costs associated with the promotion of our Martha
Stewart Signature brand. Television segment costs increased $0.6 million,
resulting primarily from higher marketing and promotion expenses related to the
syndicated program. Corporate costs increased $0.7 million as a result of media
spending relating to a corporate promotion program.
General and administrative. General and administrative expenses increased $3.5
million, or 9.5%, to $40.2 million for the nine months ended September 30, 2003,
from $36.7 million for the nine months ended September 30, 2002. Corporate costs
increased $2.7 million, or 10.5%, principally resulting from higher insurance
costs of $2.3 million, and higher professional fees. Publishing segment costs
increased $0.5 million primarily due to losses related to our Japanese
publishing venture.
Depreciation and amortization. Depreciation and amortization decreased $2.9
million, or 32.3%, to $6.1 million for the nine months ended September 30, 2003,
from $9.0 million for the nine months ended September 30, 2002. The decrease is
primarily due to lower depreciation associated with the Company's website, which
was written down by $6.1 million in the fourth quarter of 2002 in connection
with a restructuring of the Internet/Direct Commerce segment.
Interest income, net. Interest income, net, was $1.1 million for the nine months
ended September 30, 2003, compared with $1.6 million for the nine months ended
September 30, 2002. Higher average cash balances throughout the nine months were
more than offset by lower interest yields on cash and short-term investments.
Income tax benefit (provision). Income tax benefit for the nine months ended
September 30, 2003 was $4.4 million, representing a 39.1% effective income tax
rate, compared to an income tax provision of $10.2 million representing an
effective income tax rate of 41.0% for the nine months ended September 30, 2002.
The effective income tax rate in the current quarter of 2003 reflects a federal
tax rate of 35%, without giving benefit to state income tax carry-backs, but
allowing for the benefit of certain book-tax differences. State income tax
benefits available to the Company resulting from the carry-back of losses to
prior years is limited. Accordingly, the Company has not recognized any state
tax benefit for the nine month period ended September 30, 2003. Furthermore, no
tax benefit has been assumed for state and local loss carry-forwards to future
periods.
Loss from discontinued operations. Loss from discontinued operations was $0.6
million for the nine months ended September 30, 2003, compared to $2.3 million
from the same operations for the nine months ended September 30, 2002.
Discontinued operations represent the operations of the Wedding List, which the
Company decided to discontinue in 2002. The current year expenses are primarily
facility related.
Cumulative Effect Of Accounting Change. As part of the implementation of SFAS
No. 142, the Company completed the initial impairment tests in the second
quarter of 2002, with a January 1 2002 effective date, which resulted in a
charge of approximately $5.0 million ($3.1 million after taxes) to reduce the
carrying value of its goodwill related to the Internet/Direct Commerce segment
attributable to its 2001 acquisition of The Wedding List. The remaining
intangible assets represent goodwill of the Publishing segment and its fair
value exceeds the carrying value.
Net Income (Loss). Net (loss) was $7.4 million for the nine months ended
September 30, 2003, compared to a net income of $9.2 million for the nine months
ended September 30, 2002, as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $141.7 million and $131.7 million and short-term
investments were $33.7 million and $47.3 million at September 30, 2003 and
December 31, 2002, respectively.
-18-
Cash flows used in operating activities were $2.7 million during the nine months
ended September 30, 2003, compared to cash provided by operating activities of
$28.9 million during the nine months ended September 30, 2002. Cash used in
operating activities during the nine months ended September 30, 2003 were
primarily due to a net loss for the period of $7.4 million and changes in
operating assets and liabilities of $1.8 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. During the nine months ended September 30, 2002,
cash flows from operating activities of $28.9 million resulted primarily from
net income in the period increased by non-cash charges for depreciation and
amortization, the write-off of goodwill resulting from the adoption of FAS No.
142 and accrued losses related to a discontinued operation.
Cash flows provided by (used in) investing activities were $12.5 million and
$(14.6) million during the nine months ended September 30, 2003 and 2002,
respectively. 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. Cash flows used in investing activities in 2002
resulted from the sale of short-term securities of $31.2 million, offset by the
purchase of short-term investments of $42.4 million and capital expenditures of
$3.5 million.
Cash flows provided by financing activities for the nine month periods ended
September 30, 2003 and 2002 were $0.2 million and $4.0 million, respectively,
representing proceeds received from the exercise of employee stock options.
We have a line of credit with Bank of America in the amount of $10 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of September 30, 2003, we had no outstanding borrowings
under this facility.
We believe that our available cash balances together with any funds available
under existing credit facilities will be sufficient to meet our operating and
recurring cash needs for foreseeable periods. We have not paid dividends on our
common stock and have no intention to pay any dividends in the foreseeable
future.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, in our Publishing segment, the publication schedule of special
interest publications can vary from quarter to quarter. Internet/Direct Commerce
revenues have tended to be higher in the fourth quarter due to increased catalog
circulation and consumer spending during that period, although revenue in the
fourth quarter of 2003 will likely be lower than revenue in the fourth quarter
of 2002, due to a planned catalog circulation decline. Revenues from the
Merchandising segment can vary significantly from quarter to quarter due to new
product launches and the seasonality of certain product lines. In addition, we
expect to record the difference between royalties paid by Kmart and the minimum
contractual amounts due under the contract in the fourth quarter of 2003, when
such amount can be determined.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, inventories, long-lived assets and accrued losses. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies, the following may
involve the highest degree of judgment and complexity.
-19-
Revenue Recognition
Revenues are recognized when realized or realizable and earned. Revenues and
associated accounts receivable are recorded net of provisions for estimated
future returns, doubtful accounts and other allowances. Newsstand revenues in
our Publishing segment and product sales in our Internet/Direct Commerce segment
are recognized based upon assumptions with respect to future returns. The
Company bases its estimates on historical experience and current market
conditions. Reserves are adjusted regularly based upon actual results. We
maintain allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Receivables for
royalties in our merchandising business are accrued on a monthly basis and
payment is made by our strategic partners and are generally paid on a quarterly
basis. For the nine month period ended September 30, 2003, the Company has
recognized royalty revenues earned under our agreement with Kmart based upon
actual royalties earned, not contractual minimum amounts. Contractual minimum
amounts under the agreement with Kmart are computed on January 31st annually and
are payable shortly thereafter. We expect to recognize the difference between
the minimum royalty amount and royalties paid on actual sales in the fourth
quarter of 2003, when the amount can be determined.
Inventory
Inventory, consisting of paper and product merchandise, is stated at the lower
of cost or market. The Company has recorded a reserve for excess and obsolete
product inventory, reducing inventory from cost to estimated market value, based
upon historical experience and current market conditions. The reserve is
evaluated regularly based upon actual results and adjusted accordingly.
Television Production Costs
Television production costs are capitalized and amortized based upon estimates
of future revenues to be received for the applicable television product. The
Company bases its estimates on existing contracts for programs, historical
advertising rates and ratings as well as market conditions. Estimated future
revenues are adjusted regularly based upon actual results and changes in market
and other conditions.
Long-Lived Assets
We review the carrying values of our long-lived assets whenever events or
changes in circumstances indicate that such carrying values may not be
recoverable. Unforeseen events and changes in circumstances and market
conditions and material differences in the value of long-lived assets due to
changes in estimates of future cash flows could negatively affect the fair value
of our assets and result in an impairment charge.
TRENDS, RISKS AND UNCERTAINTIES
On June 4, 2003, a federal grand jury in the Southern District of New York
indicted Martha Stewart, then the Company's Chairman and Chief Executive
Officer, on charges of obstruction of an agency proceeding, making false
statements to federal investigators, conspiracy, and securities fraud. That same
day, the Securities and Exchange Commission ("SEC") filed a civil complaint
against Ms. Stewart, in the United States District Court for the Southern
District of New York, alleging violations of federal securities law. The charges
in the indictment and the SEC civil action relate to a sale by Ms. Stewart of
non-Company stock and her alleged conduct during the subsequent investigations.
Following the indictment, Ms. Stewart resigned her positions as Chairman and
Chief Executive Officer, but retained her roles as a director and the Company's
Chief Creative Officer. A trial on the criminal charges against Ms. Stewart
currently is scheduled to begin on January 12, 2004 in the Southern District of
New York. The SEC action has been stayed until further order of the court.
Since June 2002, public disclosure of various governmental investigations into
this stock sale, including an investigation by a committee of the United States
Congress, has generated a great deal of negative publicity surrounding Ms.
Stewart. Because our principal brand labels are closely associated with Ms.
Stewart, we have seen since June 2002 substantial negative impacts on our
business as a result of the uncertainty surrounding the resolution of these
legal proceedings and associated negative publicity. Although it is difficult to
quantify with any precision,
-20-
we believe that, to date, the uncertainty and publicity surrounding these
matters have contributed substantially to the following trends and uncertainties
our business has experienced since June 2002: a decline in the circulation
results and prospects of our magazines; a decrease in advertising revenues and a
general uncertainty in our advertising sales prospects; a softness in response
rates in our direct commerce business; and a slowdown in new business
development and new partner initiatives. In addition, the Company is incurring
additional expenses, principally relating to corporate communications and
corporate professional fees, associated with the matter. We believe that the
uncertainty and negative publicity surrounding the criminal trial will continue
to substantially impact our business at least until the resolution of the
proceeding. While we believe that a positive resolution to the proceeding would
have a significant positive impact on our business, and a negative resolution
would have a further negative impact on our business, we are unable to predict
with any certainty the extent to which our business would be impacted in either
event.
Recently we decided to lower the rate base (the number of copies per issue we
guarantee to advertisers) for Martha Stewart Living magazine from 2.3 million to
1.8 million copies per issue, effective with the January 2004 issue. This
reduction will likely result in lower advertising and circulation revenue for
Martha Stewart Living magazine. However, we expect to achieve cost savings as a
result of this rate base change. These cost savings will be achieved through
reduced magazine production and distribution costs, as well as the reduction of
incremental circulation acquisition costs. We expect that this rate base
reduction will allow the company to avoid costly circulation acquisition efforts
in the future.
Our Merchandising segment is highly dependent on Kmart Corporation, which has
recently emerged from operating under Chapter 11 of the United States Bankruptcy
Code. To the extent that Kmart is unable to continue to operate outside of
bankruptcy protection, we might need to secure alternative domestic distribution
for our Martha Stewart Everyday product lines. If such distribution of our
products were not secured on comparable terms it would have a material adverse
effect on our results of operations. In 2003, we expect our royalties based on
actual product sales to be less than those guaranteed in our contract with
Kmart. Because of the particular mechanics relating to the calculation of the
minimum guarantee amounts in the contract, it is impossible to ascertain at this
time the exact amount that will be payable to us under that provision. However,
the aggregate amount payable to us under the contract for the twelve-month
period ending January 31, 2004 will be at least $47.5 million. Accordingly, we
expect revenue from the Merchandising segment to approximate between $24-$26
million in the fourth quarter of 2003.
For the television season that began in September 2003, the Company has secured
distribution for the Martha Stewart Living syndicated program in approximately
90% of U.S. television households, however, at significantly lower aggregate
license fees. Additionally, there can be no assurance that we will be able to
sustain historical levels of license fees from other programming in the segment
in the future. Specifically, certain contracts relating to our cable television
shows will expire on December 31, 2003, and renewal or replacements for the
contracts have not yet been secured. Accordingly, the combined impact of the
lower license fees with the contract expirations will likely result in losses in
this segment during the next twelve months. Finally, we believe our syndicated
Martha Stewart Living program in particular, is susceptible to an immediate
adverse impact from a negative outcome in Ms. Stewart's legal proceedings,
including the loss of distribution.
On November 7, 2003, the Company completed two stock option exchange offers with
its employees.
One offer allowed certain employees to exchange stock options for restricted
stock units of approximately equivalent value. This offer resulted in the
exchange of approximately 4.3 million stock options for approximately 994,000
restricted stock units, with a total value of $10.8 million. The restricted
stock units vest 50% on the first anniversary of the grant and the remaining 50%
on the second anniversary of the grant. The company will amortize as an expense,
beginning in the fourth quarter of 2003, the value of the restricted stock units
over the two year vesting period, net of cancellations due to employee
terminations prior to vesting.
The second offer allowed certain employees to exchange stock options for a cash
award. This offer resulted in the exchange of approximately 575,000 stock
options for aggregate cash awards of $1.1 million, payable on or around June 30,
2004. The Company will amortize as expense, beginning in the fourth quarter of
2003, the total cash award to be paid over the approximate eight month vesting
period through June 30, 2004, net of cancellations due to employee terminations
prior to vesting.
In light of the continuing uncertainties relating to our businesses during this
period and the evolving marketplace
-21-
reactions to Ms. Stewart's legal situation, we are constantly evaluating all
aspects of our business and cost structure to endeavor to achieve the
appropriate balance between short-term profitability and long-term shareholder
value.
We have included in this Quarterly Report certain "forward looking statements"
as that term is defined in The Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but instead represent
only our current beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside of our control. It is possible that
our actual results may differ, possibly materially, from the anticipated results
indicated in these forward-looking statements. These statements can be
identified by terminology such as "may," "will," "should," "could," "expects,"
"intends," "plans," "anticipates," "believes," "estimates," "potential" or
"continue" or the negative of these terms or other comparable terminology. The
Company's actual results may differ materially from those projected in these
statements, and factors that could cause such differences include further
adverse reaction to the prolonged and continued negative publicity relating to
Martha Stewart by consumers, advertisers and business partners; a loss of the
services, or diminution in the reputation, of Ms. Stewart; further adverse
reaction by the Company's consumers, advertisers and business partners to the
uncertainty relating to the nature of the resolution of the criminal and civil
proceedings pending against Ms. Stewart concerning a sale of non-Company stock
by Ms. Stewart and any adverse resolution of such proceedings; adverse
resolution of some or all of the Company's ongoing litigation; downturns in
national and/or local economies; shifts in our business strategies; a softening
of the domestic advertising market; changes in consumer reading, purchasing
and/or television viewing patterns; unanticipated increases in paper, postage or
printing costs; operational or financial problems at any of our contractual
business partners; the receptivity of consumers to our new product
introductions; and changes in government regulations affecting the Company's
industries. Certain of these and other factors are discussed in more detail in
other parts of this report, especially in this section, "Management's Discussion
and Analysis".
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934) as of September 30, 2003. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 3, 2003, the Company was named as a defendant in a Consolidated and
Amended Class Action Complaint (the "Consolidated Class Action Complaint"),
filed in the United States District Court for the Southern District of New York,
by plaintiffs purporting to represent a class of persons who purchased common
stock in the Company between January 8, 2002 and October 2, 2002. In re Martha
Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The
Consolidated Class Action Complaint also names Martha Stewart and seven of the
Company's other officers (Gregory R. Blatt, Dora Braschi Cardinale, Sharon L.
Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey
(collectively, the "Individual Defendants")) as defendants. The action
consolidates seven class actions previously filed in the Southern District of
New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002),
Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002),
MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002),
Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002),
Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002),
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
-22-
Class Action Complaint seeks certification as a class action, damages,
attorney's fees and costs, and further relief as determined by the court.
The Company has also been named as a nominal defendant in four derivative
actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart
Living Omnimedia, Inc. Shareholder Derivative Litigation, filed on December 19,
2002 in New York State Supreme Court; Beam v. Stewart, initially filed on August
15, 2002 and amended on September 6, 2002, in Delaware Chancery Court; 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, Darla Moore,
Sharon Patrick, Jeffrey Ubben and former directors John Doerr and Naomi
Seligman, are also named as defendants in Beam. Mr. Martinez, Ms. Moore, Ms.
Patrick, Mr. Ubben, Mr. Doerr, Ms. Seligman, five of the Company's officers (Mr.
Blatt, Ms. Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins
Caufield & Byers are also named as defendants in Richards. Mr. Martinez, Ms.
Moore, Ms. Patrick, Mr. Ubben, 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 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 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 defendants Gregory R.
Blatt, Dora Braschi Cardinale, Sharon L. Patrick, Margaret Roach, Suzanne
Sobel, Lauren Podlach Stanich, and Gael Towey, and all remaining claims against
defendants Cardinale, Roach, Sobel, Stanich and Towey, have been dismissed
without prejudice. 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 have filed a
notice of appeal to the Delaware Supreme Court and must file their opening
brief on appeal by November 20, 2003. The Company's motion to dismiss and/or
stay the Sargent action is presently due to be filed on October 27, 2003. The
Richards action had been stayed pending resolution of the Beam motion to
dismiss, and the Company expects that stay to remain in place.
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While still in their early stages, we believe the Company has substantial
defenses to these actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Title
------ -------------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350)
(b) Reports on Form 8-K
On October 30, 2003, the Company filed a Current Report on Form 8-K reporting
its earnings for its fiscal third quarter ended September 30, 2003.
On November 5, 2003, the Company filed a Current Report on Form 8-K providing a
transcript of its third quarter earnings conference call held on October 30,
2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTHA STEWART LIVING OMNIMEDIA, INC.
Date: November 14, 2003 By: /s/ James Follo
----------------------------------------
Name: James Follo
Title: Chief Financial and
Administrative Officer
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