UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM 10-Q/A
AMENDMENT NO. 1 TO THE
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission file number 001-15395
Martha Stewart Living Omnimedia, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2187059
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11 West 42nd Street, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 827-8000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 4, 2004
Class A, $0.01 par value 19,804,779
Class B, $0.01 par value 29,758,745
--------------------------
Total 49,563,524
==========================
EXPLANATORY NOTE
This amendment on Form 10-Q/A amends the Company's Quarterly Report on Form 10-Q
for the period ended March 30, 2004, as initially filed with the Securities and
Exchange Commission (the "SEC") on May 10, 2004, and is being filed to reflect
the restatement of the Company's condensed consolidated financial statements for
the three month period ended March 31, 2004 and 2003, as discussed in Note 7 to
the Company's condensed consolidated financial statements.
The Company previously recognized as expense its estimate of annual
subscription-acquisition costs ratably throughout the year. After reviewing this
matter with its independent certified public accounting firm and its audit
committee, the Company determined on October 26, 2004 to change the method of
accounting for interim period expense recognition of its subscription
acquisition costs. The Company will now recognize subscription-acquisition costs
in the period in which the acquisition efforts take place and has restated the
financial statements included in this filing accordingly.
The Company's independent certified public accounting firm concurs with the
changes.
The change in accounting for subscription acquisition costs has no impact on
full-year results of operations or earnings (loss) per share as all subscription
acquisition costs will continue to be expensed in the year incurred.
Additional disclosures are provided in Note 2 to the Company's condensed
consolidated financial statements detailing the changes.
This amendment does not reflect events after the filing of the original report
and does not modify or update disclosures as originally filed, except as
required to reflect the effects of the restatement.
-2-
MARTHA STEWART LIVING OMNIMEDIA, INC.
Index to Form 10-Q
PAGE
----
Part I. Financial Information
Item 1. Financial Statements (restated) 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations (restated) 13
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
-3-
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, December 31,
2004 2003
-------------- ------------
(unaudited and
as restated,
see
note 2)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 166,701 $ 165,566
Short-term investments 3,100 3,100
Accounts receivable, net 20,002 39,758
Inventories, net 8,769 7,485
Deferred television production costs 2,976 3,465
Income taxes receivable 5,658 5,658
Deferred income taxes, net 1,881 5,024
Other current assets 3,197 4,422
-------------- ------------
TOTAL CURRENT ASSETS 212,284 234,478
-------------- ------------
PROPERTY, PLANT AND EQUIPMENT, net 21,297 22,673
INTANGIBLE ASSETS, net 44,257 44,257
DEFERRED INCOME TAXES 3,224 3,224
OTHER NONCURRENT ASSETS 4,455 4,470
-------------- ------------
TOTAL ASSETS $ 285,517 $ 309,102
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 23,034 $ 26,628
Accrued payroll and related costs 6,760 10,360
Income taxes payable 469 167
Current portion of deferred subscription income 24,728 23,833
-------------- ------------
TOTAL CURRENT LIABILITIES 54,991 60,988
-------------- ------------
DEFERRED SUBSCRIPTION INCOME 7,385 7,133
OTHER NONCURRENT LIABILITIES 4,308 4,316
-------------- ------------
TOTAL LIABILITIES 66,684 72,437
-------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value, 350,000
shares authorized; 19,775 and
19,628 shares outstanding in 2004 and
2003, respectively 198 196
Class B common stock, $.01 par value, 150,000 shares
authorized; 29,909 and 30,059 outstanding
in 2004 and 2003, respectively 299 301
Capital in excess of par value 185,261 183,744
Unamortized restricted stock (175) (307)
Retained earnings 34,025 53,506
-------------- ------------
219,608 237,440
Less: Class A treasury stock - 59 shares at cost (775) (775)
-------------- ------------
TOTAL SHAREHOLDERS' EQUITY 218,833 236,665
-------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 285,517 $ 309,102
============== ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share data)
As restated, see note 2
Three Months Ended
March 31,
--------------------
2004 2003
-------- --------
REVENUES
Publishing $ 23,910 $ 34,060
Television 4,177 6,615
Merchandising 10,789 10,328
Internet/Direct Commerce 5,613 7,019
-------- --------
TOTAL REVENUES 44,489 58,022
-------- --------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 28,966 35,625
Selling and promotion 13,474 10,757
General and administrative 16,914 14,974
Depreciation and amortization 1,674 2,141
-------- --------
TOTAL OPERATING COSTS AND EXPENSES 61,028 63,497
-------- --------
OPERATING LOSS (16,539) (5,475)
Interest income, net 362 402
-------- --------
LOSS BEFORE INCOME TAXES (16,177) (5,073)
Income tax (provision) benefit (3,143) 2,127
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE LOSS
FROM DISCONTINUED OPERATIONS (19,320) (2,946)
Loss from discontinued operations, net of
tax benefit in 2003 (161) (221)
-------- --------
NET LOSS $(19,481) $ (3,167)
======== ========
LOSS PER SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.39) $ (0.06)
Loss from discontinued operations 0.00 0.00
-------- --------
Net loss $ (0.39) $ (0.06)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 49,464 49,450
-------- --------
Diluted 49,464 49,450
-------- --------
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 Three Months Ended March 31, 2004
(unaudited, in thousands)
As restated, see note 2
Class A Class B Class A
common stock common stock Treasury Stock
---------------- --------------- --------------
Capital in
excess of Unamortized
par Restricted Retained
Shares Amount Shares Amount value Stock Earnings Shares Amount Total
------ ------ ------ ------ ---------- ----------- -------- ------ ------ ---------
Balance at January 1, 2004 19,628 $ 196 30,059 $ 301 $ 183,744 $ (307) $ 53,506 (59) $ (775) $ 236,665
Net loss - - - - - - (19,481) - - (19,481)
Issuance of shares for stock
option exercises 147 2 - - 192 - - - - 194
Shares returned on net
treasury basis - - (150) (2) 2 - - - - -
Amortization of restricted
stock units - - - - 1,323 - - - - 1,323
Amortization of restricted
stock - - - - - 132 - - - 132
------ ------ ------ ------ ---------- ----------- -------- ------ ------ ---------
Balance at March 31, 2004 19,775 $ 198 29,909 $ 299 $ 185,261 $ (175) $ 34,025 (59) $ (775) $ 218,833
====== ====== ====== ====== ========== ========= ======== === ====== =========
The accompanying notes are an integral part of these consolidated
financial statements.
-6-
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
As restated, see note 2
For The Three Months Ended
March 31,
--------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (19,481) $ (3,167)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,674 2,141
Amortization of restricted stock units and restricted stock 1,455 123
Deferred income tax expense 3,143 -
Changes in operating assets and liabilities 14,448 (11,198)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,239 (12,101)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (298) (306)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (298) (306)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from stock option exercises 194 -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 194 -
---------- ----------
NET INCREASE (DECREASE) IN CASH 1,135 (12,407)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 165,566 131,664
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 166,701 $ 119,257
========== ==========
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, 2003.
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. The Company
periodically reviews the requirements for a valuation allowance and makes
adjustments to such allowances when changes in circumstances result in changes
in management's judgment about the future realization of deferred tax assets.
The Company has used carryback income to realize net deferred tax assets. Since
the amounts and extent of the Company's future earnings are not determinable
with a sufficient degree of probability to recognize the deferred tax assets in
accordance with the requirements of SFAS 109, the Company has established a
valuation allowance of $9,025 in the first quarter of 2004. The Company intends
to maintain a valuation allowance until evidence would support the conclusion
that it is more likely than not that the deferred tax asset could be realized.
Until such time, except for state, local, and foreign provisions, the Company
will have no reported tax provision, net of valuation adjustments.
d. Reclassifications
Certain prior year financial information has been reclassified to conform with
fiscal 2004 financial statement presentation.
-8-
e. Stock Compensation
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation," the Company has elected to continue
accounting for employee stock compensation under the APB 25 rules, but disclose
pro forma results using SFAS No. 123's alternative accounting treatment, which
calculates the total compensation expense to be recognized as the fair value of
the award at the date of grant. The fair value of options granted were estimated
on the grant date using the Black-Scholes option pricing model, using the
following assumptions for the three month periods ended March 31, 2003. No
options were granted during the three months ended March 31, 2004.
2003
-------
risk-free interest rates 3.39%
dividend yields zero
expected volatility 134%
expected option life 6 years
average fair market value per option granted $ 8.96
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 effects on net loss for the three months ended March 31, 2004 and 2003
were as follows:
2004 2003
--------- ----------
Net loss, as restated $ (19,481) $ (3,167)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 19 2,568
--------- ----------
Proforma net loss $ (19,500) $ (5,735)
Loss per share:
Basic and diluted - as restated $ (0.39) $ (0.06)
Basic and diluted - pro forma $ (0.39) $ (0.12)
-9-
2. Restatement Relating to Interim Subscription Acquisition Costs.
Subsequent to the issuance of the March 31, 2004 condensed consolidated
financial statements, the Company determined the need to adjust the recognition
of expense related to subscription acquisition costs. The Company previously
recognized as expense its estimate of annual subscription-acquisition costs
ratably throughout the year. The Company changed its expense recognition
practice and will now recognize subscription-acquisition costs in the period in
which the acquisition efforts take place and has restated the financial
statements included in this filing accordingly. Following are the changes
presented in tabular format.
Three Months Three Months
Ended March 31, 2004 Ended March 31, 2003
As Adjust- As Adjust-
reported ment Restated reported ment Restated
-------- ------- -------- -------- ------- --------
INCOME STATEMENT
Selling and promotion $ 14,250 $ (776) $ 13,474 $ 12,821 $(2,064) $ 10,757
Operating income (loss) (17,315) 776 (16,539) (7,539) 2,064 (5,475)
Income tax benefit
(provision) (3,143) - (3,143) 2,849 (722) 2,127
Net income (loss) (20,257) 776 (19,481) (4,509) 1,342 (3,167)
Income (loss) per share $ (0.41) $ 0.02 $ (0.39) $ (0.09) $ 0.03 $ (0.06)
As of March 31, 2004
As reported Adjustment Restated
----------- ---------- --------
BALANCE SHEET
Accounts payable and accrued liabilities $ 23,810 $ (776) $ 23,034
Retained earnings 33,249 776 34,025
CASH FLOWS
Net income (loss) (20,057) 776 (19,481)
Changes in operating assets and liabilities 15,224 (776) 14,448
SHAREHOLDERS' EQUITY
Net loss (20,257) 776 (19,481)
Retained earnings $ 33,249 $ 776 $ 34,025
3. Inventories
The components of inventories are as follows:
March 31, December 31,
2004 2003
---------- ------------
Paper $ 5,930 $ 4,610
Product merchandise 4,515 4,801
---------- ------------
10,445 9,411
Less: reserve for obsolete and
excess inventory
1,676 1,926
---------- ------------
$ 8,769 $ 7,485
========== ============
4. Loss per share
Loss per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic loss per share is calculated by dividing net loss by the
weighted-average number of common shares outstanding during each period. Diluted
loss per share include the determinants of basic loss per share and, in
addition, give effect to potentially dilutive common shares. For the three
months ended March 31, 2004 and 2003, 403 and 4,509 stock options were excluded
from the calculation of diluted loss per share, as their inclusion would be
antidilutive.
5. Industry segments
The Company is a leading creator of original "how to" content and related
products for homemakers and other consumers. The Company's business segments are
Publishing, Television, Merchandising and Internet/Direct Commerce. The
Publishing segment primarily consists of the Company's magazine operations, and
also those related to its book and newspaper operations. The Television segment
consists of the Company's television production operations that produce
television programming that airs in syndication in the United States and on
cable in the United States, and certain other international markets. The
Merchandising segment consists of the Company's operations related to the design
of merchandise and related promotional and packaging materials that are
distributed by its retail and manufacturing partners in exchange for royalty
income. The Internet/Direct Commerce segment comprises the Company's operations
relating to its catalog, Martha Stewart: The Catalog For Living, its
direct-to-consumer floral business and the website marthastewart.com.
The Company believes operating income before depreciation and amortization
("OIDA") is an appropriate measure when evaluating the operating performance of
its business segments and the Company on a consolidated basis. OIDA is used
externally by the Company's investors, analysts, and industry peers. OIDA is
among the primary metrics used by management for planning and forecasting of
future periods, and is considered an important indicator of the operational
strength of the Company's businesses. The Company believes the presentation of
this measure is relevant and useful for investors because it allows investors to
view performance in a manner similar to the method used by the Company's
management and makes it easier to compare the Company's results with other
companies that have different capital structures or tax rates. The Company
believes OIDA should be considered in addition to, not as a substitute for,
operating income (loss), net income (loss), cash flows, and other measures of
financial performance prepared in accordance with generally accepted accounting
principles ("GAAP"). As OIDA is not a measure of performance calculated in
accordance with GAAP, this measure may not be comparable to similarly titled
measures employed by other companies.
-10-
Revenues for each segment are presented in the condensed consolidated statements
of income. Income (loss) from operations for each segment were as follows:
Three Months Ended
March 31,
As restated, see note 2
-------------------------------
2004 2003
---------- ----------
OPERATING INCOME (LOSS)
Publishing $ (3,848) $ 7,036
Television (1,947) 227
Merchandising 6,489 7,035
Internet/Direct Commerce (2,679) (8,252)
---------- ----------
Operating Income (Loss) before Corporate Overhead (1,985) 6,046
Corporate Overhead (14,553) (11,521)
---------- ----------
TOTAL OPERATING LOSS (16,538) (5,475)
---------- ----------
DEPRECIATION AND AMORTIZATION
Publishing 62 41
Television 57 394
Merchandising 190 168
Internet/Direct Commerce 243 247
Corporate Overhead 1,122 1,291
---------- ----------
TOTAL DEPRECIATION AND AMORTIZATION 1,674 2,141
---------- ----------
OPERATING INCOME (LOSS) BEFORE
DEPRECIATION AND AMORTIZATION
Publishing (3,786) 7,077
Television (1,890) 621
Merchandising 6,679 7,203
Internet/Direct Commerce (2,436) (8,005)
---------- ----------
Operating Income (Loss) before Depreciation and
Amortization before Corporate Overhead (1,433) 6,896
Corporate Overhead, excluding Depreciation and
Amortization (13,431) (10,230)
---------- ----------
TOTAL OPERATING LOSS BEFORE DEPRECIATION AND AMORTIZATION $ (14,864) $ (3,334)
========== ==========
-11-
6. 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.
Operating results for The Wedding List for the three months ended March 31, 2004
and 2003 were as follows:
March 31, March 31,
2004 2003
--------- ---------
Revenues $ - $ 572
Loss from operations, including accrued restructuring
and shutdown costs (161) (340)
Income tax benefit - 119
--------- ---------
Net loss from discontinued operations $ (161) $ (221)
========= =========
7. Supplemental cash flow information:
Three Months Ended
March 31,
------------------
2004 2003
---- ------
Cash paid for interest $ - $ 13
Cash paid for income taxes 11 1,529
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Restated)
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 MARCH 31, 2004 TO THREE MONTHS ENDED MARCH 31,
2003
Three Months Ended
March 31,
------------------------
2004 2003
-------- --------
(in thousands, except
per share amounts)
REVENUES
Publishing $ 23,910 $ 34,060
Television 4,177 6,615
Merchandising 10,789 10,328
Internet/Direct Commerce 5,613 7,019
-------- --------
TOTAL REVENUES 44,489 58,022
-------- --------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 28,966 35,625
Selling and promotion 13,474 10,757
General and administrative 16,914 14,974
Depreciation and amortization 1,674 2,141
-------- --------
TOTAL OPERATING COSTS AND EXPENSES 61,028 63,497
-------- --------
OPERATING LOSS (16,539) (5,475)
Interest income , net 362 402
-------- --------
LOSS BEFORE INCOME TAXES (16,177) (5,073)
Income tax (provision) benefit (3,143) 2,127
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE LOSS FROM
DISCONTINUED OPERATIONS (19,320) (2,946)
-------- --------
Loss from discontinued operations (161) (221)
-------- --------
NET LOSS $(19,481) $ (3,167)
======== ========
EXECUTIVE SUMMARY
TRENDS, RISKS AND UNCERTAINTIES
Since June 2002, public disclosure of various governmental investigations into
Martha Stewart's sale of non-Company stock and of the criminal and civil charges
against Ms. Stewart arising out of the investigations has generated a great deal
of negative publicity surrounding Ms. Stewart. Because our principal brand
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 difficult to quantify with any precision, we believe that
the uncertainty and publicity surrounding these matters contributed
substantially to some of the adverse trends our business has experienced since
June 2002.
-13-
On June 4, 2003, a federal grand jury in the United States District Court for
the Southern District of New York indicted Ms. Stewart, then the Company's
Chairman and Chief Executive Officer, on charges of obstruction of an agency
proceeding, making false statements to federal investigators, conspiracy, and
securities fraud. That same day, the Securities and Exchange Commission ("SEC")
filed a civil complaint against Ms. Stewart, in the United States District Court
for the Southern District of New York, alleging violations of federal securities
law. On July 10, 2003, the SEC action was stayed until further order of the
court. Following the indictment, Ms. Stewart resigned her positions as Chairman
and Chief Executive Officer, but retained her roles as a director and the
Company's Chief Creative Officer.
On March 5, 2004, Martha Stewart was found guilty of conspiracy, obstruction of
an agency proceeding, and making false statements to federal investigators
concerning her personal sale of non-Company stock. Ms. Stewart is scheduled to
be sentenced on June 17, 2004. On March 15, 2004, Ms. Stewart resigned her
positions as a director and Chief Creative Officer of the Company, and assumed
the position of Founding Editorial Director, a non-officer position.
The Company has been carefully evaluating the responses of customers,
advertisers, and business partners to the outcome of Ms. Stewart's trial, in
order to assess the potential impact upon the Company's portfolio of assets and
make appropriate decisions with respect to the Company's business operations and
strategy. In light of the results of this assessment, the Company may consider
and implement a broad range of business initiatives and strategic alternatives.
These may include, without limitation, the rebranding of certain assets, changes
in core content areas, new business initiatives, development of new expert
personalities, changes in relationships with strategic partners, disposition of
certain products, assets and businesses, and cost reduction initiatives as well
as other business efficiencies.
Although we are unable to predict the full effect of the outcome of Ms.
Stewart's trial on our business, we have experienced further declines in
advertising revenues since the trial outcome, principally in our publishing
segment. In addition, we may be deprived of Ms. Stewart's services for a period
of time. We may experience further material adverse impacts as a result of the
trial outcome, including, without limitation, additional revenue declines,
additional litigation, additional expenses relating to corporate communications
and corporate professional fees and loss of key personnel. For the first quarter
of 2004, we suffered a net loss of $20.3 million compared to a net loss of $4.5
million in the same quarter of the prior year. We may sustain substantial
operating losses in future periods and our cash position may be materially
adversely affected.
In 2003, prior to the resolution of Ms. Stewart's criminal proceeding, 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. Although this reduction
has resulted and will continue to result in lower advertising rates and lower
circulation revenue on a year-over-year basis for Martha Stewart Living
magazine, we will achieve cost savings through reduced magazine production and
distribution costs and reduction of incremental circulation acquisition costs as
a result of the rate base change.
Since March 5, 2004, the availability of the Martha Stewart Living television
program has declined to approximately 50% of U.S. television households from
previous levels of approximately 90% primarily due to the loss of coverage from
the CBS owned and operated stations. This reduction in household coverage will
result in lower license fees and advertising revenues. In light of this
development, we are evaluating future strategic actions with respect to our
Television business for the television season beginning September 2004 and
beyond. However, we currently intend to provide content for the remainder of the
current season. Additionally, certain contracts relating to our cable television
shows expired on December 31, 2003 and were not renewed. We believe that the
combined impact of lower license fees, reduction in household coverage of our
flagship syndicated television program, and contract expirations will result in
losses in the Television segment in 2004.
On February 11, 2004, Kmart Corporation filed an action with the United States
Bankruptcy Court, Northern District of Illinois, Eastern Division, against MSO
IP Holdings, Inc., a wholly owned subsidiary of MSO, seeking declaratory and
other relief under the June 2001 contract between Kmart and MSO IP. In its
complaint, Kmart sought to interpret the agreement in a manner that would
require it to make minimum royalty payments for the remaining life of the
contract based solely upon aggregate sales of licensed products. In addition,
Kmart sought to reduce the amount it is obligated under the contract to spend
with MSO on advertising in MSO media properties. On April 22, 2004, we reached
an agreement with Kmart to amend the terms of our contract and executed certain
-14-
releases. We believe that this agreement better aligns the two companies' mutual
business interests. In connection with the amendment and releases, on April 23,
2004, Kmart voluntarily dismissed its complaint with prejudice, terminating the
litigation. The amendment, among other things, extends the Kmart contract for an
additional two years and expands the scope of the contract to cover several new
product categories. At the same time, the amendment eliminates, with respect to
2003 and subsequent years, provisions of the contract providing for payment of
guaranteed minimum royalties by individual product category and reduces the
amount Kmart is obligated under the contract to spend with MSO on advertising in
MSO media properties. The amendment also reduces the aggregate minimum royalty
payments. The aggregate minimum royalty payment for the period February 1, 2004
to January 31, 2005 was reduced to $49 million from $53.4 million previously. We
continue to expect that the minimum guaranteed royalty payments will exceed
actual royalties earned from retail sales through January 31, 2008. For the
contract years ending January 31, 2009 and 2010, we currently anticipate that
royalties earned will be based upon actual royalties from retail sales, rather
than the contractual minimums for such years.
To date, since March 5, 2004, we have not experienced any material adverse
impact on sales of our products or circulation of our magazines.
Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31,
2003
Revenues. Total revenues decreased $13.5 million, or 23.3%, to $44.5 million for
the quarter ended March 31, 2004, from $58.0 million for the quarter ended March
31, 2003.
Publishing revenues decreased $10.2 million, or 29.8%, to $23.9 million for the
quarter ended March 31, 2004, from $34.1 million for the quarter ended March 31,
2003. This decrease was primarily due to a decrease in advertising revenues of
$11.5 million. The decrease in advertising revenue resulted primarily from fewer
advertising pages in Martha Stewart Living, as well as a reduction in the
advertising page rate, due in part to the rate base (the number of copies per
issue we guarantee to advertisers) reduction which became effective commensurate
with the January 2004 issue. The total quarterly decrease in advertising revenue
in Martha Stewart Living was $8.5 million. The reduction in advertising revenue
was also attributable to lower advertising revenue in Everyday Food of $2.6
million, as the prior year's quarter included advertising revenues from a
sponsorship arrangement. Circulation revenue increased $1.6 million in the
quarter. The increase in circulation revenues was primarily due to the higher
circulation and increased frequency of Everyday Food, as well as an additional
Special Interest Publication (SIP) published in the quarter. The increase was
partially offset by lower subscription revenues from Martha Stewart Living
magazine, due primarily to lower subscription copies sold as part of our rate
base reduction.
Television revenues decreased $2.4 million, or 36.9%, to $4.2 million for the
quarter ended March 31, 2004, from $6.6 million for the quarter ended March 31,
2003. The decrease is primarily attributable to lower revenue from our
syndicated daily program of $1.4 million due in part to lower license fees. The
segment was also impacted by the expiration of certain cable licensing contracts
effective December 31, 2003.
Merchandising revenues increased $0.5 million, or 4.5%, to $10.8 million for the
quarter ended March 31, 2004, from $10.3 million for the quarter ended March 31,
2003, primarily due to recognizing as revenue the pro-rata portion of the
contractual minimum royalty amount, totaling $2.4 million, due from Kmart for
the 12 month period ended January 31, 2004, relating to January 2004. We expect
the minimum guarantees will exceed actual royalties earned from retail sales for
the foreseeable future primarily due to store closings. Royalties earned on
actual product sales (excluding minimum guarantees) declined on a
quarter-over-quarter basis principally due to the impact of Kmart store closings
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 5%
on February 1, 2004. Revenue from Kmart represented approximately 83% of total
segment revenue for the quarter ended March 31, 2004. The quarter also benefited
from the launch of our Martha Stewart Everyday product at Sears Canada in
September of 2003. Royalty revenue from the sales of Martha Stewart Signature
products increased $0.2 million for the period ended March 31, 2004.
Internet/Direct Commerce revenues decreased $1.4 million, or 20.0%, to $5.6
million for the quarter ended March 31, 2004, from $7.0 million for the quarter
ended March 31, 2003 due to lower commerce sales related to our catalog
offerings and lower advertising revenue, partially offset by higher revenue from
our direct-to-consumer floral business. The lower commerce sales are primarily
due to planned lower catalog circulation.
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Magazine Publication Schedule
Three month period ended March 31,:
2004 2003
------------ ------------
Martha Stewart Living Three Issues Three Issues
Everyday Food Three Issues Two Issues
Special Interest Publications Three Issues Two Issues
Production, Distribution and Editorial. Production, distribution and editorial
expenses decreased $6.7 million, or 18.7%, to $29.0 million for the quarter
ended March 31 2004, from $35.6 million for the quarter ended March 31, 2003.
Internet/Direct Commerce costs decreased $5.5 million. Reduced costs in the
segment reflect lower catalog production and distribution costs of $2.4 million
due to reduced catalog circulation. Lower costs were also due in part to lower
product sales, an improved product gross margin and improved distribution
efficiencies which collectively contributed to $2.1 million of lower costs in
the quarter. The segment continued to benefit from the prior year restructuring
which reduced headcount and lowered technology costs. Publishing segment costs
decreased $1.8 million primarily reflecting lower paper, printing and
distribution costs of Martha Stewart Living magazine, due mainly to a lower
number of pages printed per issue and lower circulation, partially offset by the
additional costs associated with the publication of an additional issue of
Everyday Food as well as an additional SIP in the quarter.
Selling and Promotion. Selling and promotion expenses increased $2.7 million, or
25.3%, to $13.5 million for the quarter ended March 31, 2004, from $9.5 million
for the quarter ended March 31, 2003. Publishing segment costs increased $2.8
million resulting primarily from circulation acquisition costs relating to
Everyday Food and one of our SIP's, partially offset by lower spending related
to Martha Stewart Living magazine.
General and Administrative. General and administrative expenses increased $1.9
million, or 13.0%, to $16.9 million for the quarter ended March 31, 2004, from
$15.0 million for the quarter ended March 31, 2003. Corporate costs increased
$3.2 million principally resulting from higher employee-related costs, including
the November 2003 stock option exchange offers of $1.7 million and higher legal,
corporate communications and consulting fees. Internet/Direct Commerce costs
decreased $1.4 million primarily due to the absence of costs incurred in the
prior year related to consulting and severance costs.
Depreciation and Amortization. Depreciation and amortization decreased $0.5
million, or 21.8%, to $1.7 million for the quarter ended March 31, 2004, from
$2.1 million for the quarter ended March 31, 2003. The decrease is primarily due
to lower depreciation associated with certain assets of our Connecticut
television studio. The company reduced the net carrying value of those assets in
the fourth quarter of 2003.
Income tax benefit (expense). Income tax expense for the three months ended
March 31, 2004 was $3.1 million, compared to an income tax benefit of $2.1
million, representing an effective income tax rate of 42% for the three months
ended March 31, 2003. The current period provision reflects a valuation
allowance of $9.0 million taken against certain deferred tax assets since the
amounts and extent of the Company's future earnings are not determinable with a
sufficient degree of probability.
Loss from discontinued operations. Loss from discontinued operations was $0.2
million for the three months ended March 31, 2004 and 2003. Discontinued
operations represent the operations of the Wedding List, which the Company
decided to discontinue in 2002. The current year expenses are primarily facility
related.
Net Loss. Net loss was $(19.5) million for the three months ended March 31,
2004, compared to a net loss of ($3.2) million for the three months ended March
31, 2003, as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $166.7 million and $165.6 million and short-term
investments were $3.1 million and $3.1 million at March 31, 2004 and December
31, 2003, respectively.
Cash flows provided by operating activities were $1.2 million during the three
months ended March 31, 2004, compared to cash used in operating activities of
$12.1 million during the three months ended March 31, 2003. Cash
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provided by operating activities during the three months ended March 31, 2004
were primarily due to a changes in operating assets and liabilities of $14.4
million, an increase in the deferred income tax expense, and by depreciation and
amortization of $1.7 million as well as the amortization of restricted stock
units and restricted stock of $1.5 million, partially offset by a net loss for
the period of $19.5 million. The changes in operating assets and liabilities
include a decrease in accounts receivable due principally to the collection of a
royalty receivable due from Kmart related to our minimum royalty payment,
partially offset by a decrease in certain accounts payable. Cash used in
operating activities during the three months ended March 31, 2003 was primarily
due to a net loss for the period of $3.2 million and changes in operating assets
and liabilities reducing cash flow of $11.2 million, partially offset by
depreciation and amortization of $2.1 million. Cash used by changes in operating
assets and liabilities during the quarter is primarily a result of decreases in
accounts payable and accrued liabilities and accrued payroll and related costs,
partially offset by decreased accounts receivable.
Cash flows used in investing activities were $0.3 million in each of the three
month periods ended March 31, 2004 and 2003. Cash flows used in investing
activities in both periods resulted from capital expenditures.
Cash flows provided by financing activities for the three month period ended
March 31, 2004 were $0.2 million, 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 March 31, 2004, 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. Revenues from the
Merchandising segment can vary significantly from quarter to quarter due to new
product launches and the seasonality of certain product lines. In addition, we
expect to recognize the pro-rata portion of the difference between the minimum
royalty amount under the Kmart contract and royalties paid on actual sales in
the fourth quarter of 2004, when the amount can be determined.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts, inventories, deferred tax assets, long-lived assets and
accrued losses. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe that, of our significant accounting policies, the following may
involve the highest degree of judgment and complexity.
Revenue Recognition
Revenues are recognized when realized or realizable and earned. Revenues and
associated accounts receivable are recorded net of provisions for estimated
future returns, doubtful accounts and other allowances. Newsstand revenues
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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 generally made by our strategic partners on a quarterly basis. For
the three month period ended March 31, 2004, the Company has recognized the
pro-rata portion of the contractual minimum royalty amount due from Kmart for
the period ended January 31, 2004, relating to January 2004. Revenues recorded
under our agreement with Kmart for the months of February and March were based
on 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 pro-rata portion of
the difference between the minimum royalty amount and royalties paid on actual
sales in the fourth quarter of 2004, 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.
Intangible assets
Commencing January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible
assets with indefinite lives no longer be amortized to earnings and be tested
for impairment at least annually. The impairment tests are based upon a
fair-value approach as described in SFAS No. 142. Tests for impairment or
recoverability require significant management judgment, and future events
affecting cash flows and market conditions could result in impairment losses.
Forward-looking Statements
We have included in this Quarterly Report certain "forward-looking statements,"
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but instead represent
only our current beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside of our control. These statements
can be identified by terminology such as "may," "will," "should," "could",
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. The Company's actual results may differ materially from those
projected in these statements, and factors that could cause such differences
include further adverse reaction to the prolonged and continued negative
publicity relating to Martha Stewart by consumers, advertisers and business
partners; further adverse reaction by the Company's consumers, advertisers and
business partners to the outcome of Ms. Stewart's trial arising from a sale of
non-Company stock by Ms. Stewart; a loss of the services of
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Ms. Stewart; a loss of the services of other key personnel; an adverse
resolution to the SEC enforcement proceeding currently underway against Ms.
Stewart arising from her personal sale of non-Company stock; adverse resolution
of some or all of the Company's ongoing litigation; downturns in national and/or
local economies; shifts in our business strategies; a softening of the domestic
advertising market; changes in consumer reading, purchasing and/or television
viewing patterns; unanticipated increases in paper, postage or printing costs;
operational or financial problems 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 of Financial
Condition and Results of Operations."
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 March 31, 2004. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation. In addition, no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kmart Litigation. On February 11, 2004 Kmart Corporation filed an action with
the United States Bankruptcy Court, Northern District of Illinois, Eastern
Division, against MSO IP Holdings, Inc., a wholly owned subsidiary of MSO,
seeking declaratory and other relief under the June 2001 contract between Kmart
and MSO IP. Kmart sought to interpret the agreement in a manner that would
require it to make minimum royalty payments for the remaining life of the
contract based solely upon aggregate sales of licensed products. In addition,
Kmart sought to reduce by approximately $1 to $2 million annually the amount it
is obligated under the contract to spend with MSO on advertising in MSO media
properties.
On April 22, 2004, MSO IP and Kmart executed an amendment to the June 2001
contract between MSO IP and Kmart, as well as certain mutual releases. In
connection with the amendment and releases, on April 23, 2004 Kmart voluntarily
dismissed its complaint with prejudice, terminating the litigation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Executive Summary - Trends, Risks and Uncertainties."
Other Company Litigation. On February 3, 2003, the Company was named as a
defendant in a Consolidated and Amended Class Action Complaint (the
"Consolidated Class Action Complaint"), filed in the United States District
Court for the Southern District of New York, by plaintiffs purporting to
represent a class of persons who purchased common stock in the Company between
January 8, 2002 and October 2, 2002. In re Martha Stewart Living Omnimedia, Inc.
Securities Litigation, 02-CV-6273 (JES). The Consolidated Class Action Complaint
also names Martha Stewart and seven of the Company's other present or former
officers (Gregory R. Blatt, Sharon L. Patrick, and five other Company officers
(collectively, the "Individual Defendants")) as defendants. The action
consolidates seven class actions previously filed in the Southern District of
New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002),
Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002),
MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002),
Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002),
Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002),
Steele v. Martha Stewart Living Omnimedia, Inc. (filed September 13, 2002), and
Hackbarth v Martha Stewart Living Omnimedia, Inc. (filed September 18, 2002).
The claims in the Consolidated Class Action Complaint arise out of Ms. Stewart's
sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The
plaintiffs assert violations of Sections 10(b) (and rules promulgated
thereunder), 20(a) and 20A of the Securities Exchange Act of 1934. The
plaintiffs allege that MSO, Ms. Stewart and the Individual Defendants made
statements about Ms. Stewart's sale that were materially false and misleading.
The plaintiffs allege that, as a result of these false and
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misleading statements, the market price of the Company's stock was inflated
during the putative class periods and dropped after the alleged falsity of the
statements became public. The plaintiffs further allege that the Individual
Defendants traded MSO stock while in possession of material non-public
information. The Consolidated Class Action Complaint seeks certification as a
class action, damages, attorneys' fees and costs, and further relief as
determined by the court.
On May 19, 2003, the Company's motion to dismiss the Consolidated Class Action
Complaint was denied, and discovery in that action is ongoing. By stipulation of
the parties, and an order of the court entered November 10, 2003, all claims
asserted in the Consolidated Class Action Complaint pursuant to Section 20A
(Insider Trading) of the Securities Exchange Act against the Individual
Defendants, and all remaining claims against the Individual Defendants, other
than Mr. Blatt and Ms. Patrick, have been dismissed without prejudice.
The Company has also been named as a nominal defendant in four derivative
actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart
Living Omnimedia, Inc. Shareholder Derivative Litigation (the "Shareholder
Derivative Litigation"), filed on December 19, 2002 in New York State Supreme
Court; Beam v. Stewart, initially filed on August 15, 2002 and amended on
September 6, 2002, in Delaware Chancery Court; Richards v. Stewart, filed on
November 1, 2002 in Connecticut Superior Court; and Sargent v. Martinez, filed
on September 29, 2003 in the U.S. District Court for the Southern District of
New York. Company directors Arthur Martinez, Sharon Patrick, Jeffrey Ubben and
former directors John Doerr, Darla Moore and Naomi Seligman, are also named as
defendants in Beam. Mr. Martinez, Ms. Patrick, Mr. Ubben, Mr. Doerr, Ms. Moore,
Ms. Seligman, five of the Company's present or former officers (Mr. Blatt, Ms.
Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins Caufield &
Byers are also named as defendants in Richards. Mr. Martinez, Ms. Patrick, Mr.
Ubben, Ms. Moore and Ms. Seligman are also named as defendants in Sargent. In re
Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation
consolidates three previous derivative complaints filed in New York State
Supreme Court and 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.
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On April, 17, 2003, the Company's motion to dismiss the Shareholder Derivative
Litigation was granted to the extent that the action has been stayed pending
plaintiffs' submission of a demand to initiate litigation on the Company's Board
or a determination by the Federal District Court in the Acosta action (now the
consolidated Sargent action) that such a demand is excused. On September 30,
2003, the Company's motion to dismiss the Beam complaint was granted in its
entirety. The plaintiffs in Beam appealed the dismissal of the complaint to the
Delaware Supreme Court. On March 31, 2004, the Delaware Supreme Court, sitting
en banc, unanimously affirmed the dismissal of the Beam complaint. The Sargent
action had previously been stayed by order of the court pending resolution of
the Beam appeal by the Delaware Supreme Court. On April 22, 2004, the court
lifted that stay and ordered the plaintiffs to respond to MSO's and the MSO
directors' previously filed motions to dismiss. Oral argument on those motions
to dismiss is scheduled for July 23, 2004. The Richards action had been stayed
by agreement of the parties pending resolution of the Beam appeal by the
Delaware Supreme Court. By agreement of the parties, MSO's and the director
defendants' motions to dismiss the Richards action are due to be filed on June
14, 2004.
While still in their early stages, we believe the Company has substantial
defenses to the Consolidated Class Action Complaint and the derivative 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
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10.1 Amendment, dated as of March 15, 2004, to the Employment
Agreement, dated October 22, 1999, as amended, by and
between the Company and Martha Stewart
10.2 Amendment, dated as of March 15, 2004, to the Location
Rental Agreement, dated October 22, 1999, as amended, by and
between the Company and Martha Stewart
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 March 4, 2004, the Company filed a Current Report on Form 8-K reporting
its earnings for its fiscal fourth quarter ended December 31, 2003.
On March 9, 2004, the Company filed a Current Report on Form 8-K providing a
transcript of its fiscal fourth quarter earnings conference call held on
March 4, 2004.
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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 1, 2004
/s/ James Follo
----------------------------------------------
Name: James Follo
Title: Executive Vice President, Chief
Financial and Administrative Officer
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